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United States Government Accountability Office: GAO: 

Report to Congressional Requesters: 

May 2014: 

Retirement Security: 

Oversight of the National Railroad Retirement Investment Trust: 

GAO-14-312: 

GAO Highlights: 

Highlights of GAO-14-312, a report to congressional requesters. 

Why GAO Did This Study: 

The Trust was established by federal statute effective in 2002 to 
manage a portion of the assets the Board uses to pay benefits to 
retired railroad workers, and managed about $25 billion in assets as 
of 2013. The Trust invests assets in stocks, bonds, and other 
investment vehicles in a manner similar to that of defined benefit 
plans. To insulate the Trust from political influence over its 
investment decisions, the Trust was established independent of the 
federal government. It is exempted from the federal law that governs 
the financial operations of the U.S. government and which establishes 
the duties and powers of the GAO. GAO assessed (1) the performance 
audit policies and practices that exist for oversight of the Trust; 
(2) the performance audit policies that apply to comparable 
organizations, such as large state public pension plans; and (3) what 
options, if any, could be pursued to improve Trust performance audit 
policies and what tradeoffs stakeholders believe such options entail. 

GAO reviewed applicable federal laws, Trust policies and procedures, 
and relevant reports such as state, federal, and Trust-commissioned 
performance audit reports. GAO also interviewed officials of the 
Board, state and federal pension plans, the state Auditors General, 
and private plan fiduciary experts. 

What GAO Found: 

Oversight of the National Railroad Retirement Investment Trust (Trust) 
includes both regular reporting and communications with the Railroad 
Retirement Board (Board), and periodic performance audits that the 
Trust has opted to commission; however, no written requirement for 
such audits exists. The Trust's mandatory annual management report 
includes financial and descriptive information, including a discussion 
of the evolution, current status and performance of the Trust's 
investment portfolio and administrative costs, including investment 
manager fees. The Trust has also commissioned four external 
performance audits since its creation—the first in 2004 and the most 
recent in 2012. These reviews have encompassed a wide range of issues, 
including the accuracy of monthly reports, compliance with Trust 
investment manager hiring policies, processes to ensure accuracy of 
financial recordkeeping and internal controls, adequacy of due 
diligence procedures, and the role of non-traditional investments. 

Performance audit practices of comparable entities can differ from the 
Trust in scope and frequency. The large majority of state pension 
plans and two federal programs GAO reviewed that manage investment 
assets are subject to performance audits that can be initiated and 
conducted by an external entity, and some of these audits have 
addressed issues Trust-commissioned audits have not included. Forty- 
two of the 50 state plans GAO contacted are subject to performance 
audits that can be initiated and conducted by an external auditor, 
such as state Auditors General or equivalent, or by offices of 
internal audit. In some cases, the external auditor reviews the plan 
annually, while in others, plans are audited less frequently. Both 
federal programs—-the Pension Benefit Guaranty Corporation's single- 
employer insurance program and the Thrift Savings Plan—-are also 
subject to externally initiated and conducted performance audits. 
State and federal audits varied in subject and scope, and in some 
cases, examined issues that Trust-commissioned reviews have not yet 
included, such as ethics and conflict of interest policies. Experts 
told GAO that Trust performance audit practices are comparable to 
those of large private sector plans governed by the Employee 
Retirement Income Security Act of 1974. 

Based on our review of oversight models that apply to state plans and 
other information, GAO developed several options to enhance the 
Trust's performance audit practices, and stakeholders identified 
potential advantages and limitations pertaining to them. For example, 
the Board's Office of Inspector General (OIG) could be granted 
authority to conduct performance audits, which would help ensure these 
reviews are initiated and performed independent of the Trust. However, 
both Board and Trust officials had reservations about this option, 
stating that the OIG lacks sufficient expertise in aspects of the 
Trust investment program, and expressing concerns about what they 
perceive as an unconstructive working relationship. The Trust's 
practice of commissioning periodic performance audits could be 
established as a formal requirement, either through a memorandum of 
agreement between the key parties, or through a statutory amendment, 
with external input on subject and scope of the audits. Trust and 
Board officials stated that this would be a reasonable option, and in 
early 2014 developed an initial proposal to implement such an 
agreement. 

What GAO Recommends: 

This report makes no recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-14-312]. For more 
information, contact Charles A. Jeszeck (202) 512-7215 or 
jeszeckc@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Trust Oversight Includes Mandatory Reporting and Voluntary Periodic 
Performance Audits: 

Performance Audit Practices of Comparable Entities Can Differ from the 
Trust in Scope and Frequency: 

Key Parties Noted Tradeoffs with Expanded Trust Oversight: 

Concluding Observations: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the National Railroad Retirement Investment 
Trust: 

Appendix III: Comments from the Railroad Retirement Board: 

Appendix IV: Comments from the Railroad Retirement Board Office of 
Inspector General: 

Appendix V: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Comparison of Railroad Retirement Board Tier II Benefits to 
Public and Private Sector Defined Benefit (DB) Plan Benefits: 

Table 2: Trust Annual Management Report Contents: 

Table 3: Overview of Scope and Objectives of Trust Performance Audits: 

Table 4: Subject Categories of Selected State, Federal, and Trust 
Internal and External Performance Audits: 

Table 5: Possible Policy Options for Enhancing Trust Oversight: 

Figures: 

Figure 1: Division of Key Responsibilities and Flow of Money between 
the Trust and Board Accounts at Treasury: 

Figure 2: Trust, State, and Federal Performance Audit Practices: 

Figure 3: Frequency of External Performance Audits: 

Abbreviations: 

Board: Railroad Retirement Board: 

DB: defined benefit: 

EBSA: Employee Benefit Security Administration: 

ERISA: Employee Retirement Income Security Act of 1974: 

MOU: memorandum of understanding: 

OIG: Office of Inspector General: 

OMB: Office of Management and Budget: 

PBGC: Pension Benefit Guaranty Corporation: 

SOSI: Statement of Social Insurance: 

Treasury: Department of the Treasury: 

Trust: National Railroad Retirement Investment Trust: 

TSP: Thrift Savings Plan: 

[End of section] 

United States Government Accountability Office: GAO:
441 G St. N.W. 
Washington, DC 20548: 

May 15, 2014: 

The Honorable Lamar Alexander: 
Ranking Member: 
Committee on Health, Education, Labor, and Pensions: United States 
Senate: 

The Honorable Michael B. Enzi: 
Committee on Health, Education, Labor, and Pensions: United States 
Senate: 

The Honorable Johnny Isakson: 
Committee on Health, Education, Labor, and Pensions: United States 
Senate: 

The National Railroad Retirement Investment Trust (Trust)[Footnote 1] 
is responsible for investing and overseeing about $25 billion in 
federal assets used to pay benefits to retired railroad workers 
through the railroad retirement program managed by the Railroad 
Retirement Board (Board).[Footnote 2] The Trust was established by 
statute effective in 2002 to manage and invest these funds and was 
granted broad authority to invest in equities, bonds, and other assets 
in the same manner as private sector pension plans.[Footnote 3] The 
statute establishing the Trust provides that it is not a department, 
agency, or instrumentality of the federal government and that it is 
not subject to statutory provisions governing the financial operations 
of the federal government. As a result, oversight requirements that 
typically apply with respect to federal programs and activities do not 
apply to the Trust and its activities, although the Trust is subject 
to limited oversight by the Board and is also required to have its 
financial statements audited annually. Recent financial markets crises 
and instances of malfeasance in the management of some large public 
pension plans have raised concerns about the financial risks that 
pension plans face generally, and the adequacy of existing Trust 
oversight. 

In light of the importance of these assets to the future financial 
security of railroad retirees, and the limited oversight of the Trust, 
we reviewed existing Trust oversight mechanisms. Because the Trust's 
financial statements are audited annually, we focused our review on 
performance audits, broadly defined; issues pertaining to financial 
statement audits were excluded from our scope.[Footnote 4] 
Specifically, we sought to answer the following questions. 

1. What performance audit policies and practices exist for the 
oversight of the National Railroad Retirement Investment Trust (Trust)? 

2. What performance audit policies apply to comparable organizations, 
such as large state public pension plans? 

3. What options, if any, could be pursued to improve Trust performance 
audit policies and what tradeoffs do stakeholders believe such options 
entail? 

To answer the first question, we interviewed representatives of the 
Board, the Railroad Retirement Board Office of Inspector General 
(OIG), and the Trust, including officials who were intimately involved 
in creation of the Trust. We also reviewed relevant federal law, 
regulations, and legislative histories, the Trust's written policies 
and publications--including annual reports and audit reports--and 
related publications of other federal agencies such as the Social 
Security Administration. To answer the second question, we interviewed 
officials of large public retirement plans in each of the 50 states, 
and conducted in-depth case studies of seven large state plans. 
[Footnote 5] For each case study, we interviewed state pension 
officials, such as the Executive Director of the largest plan or 
investment entity, and representatives of state auditors general or 
comparable entity with authority to audit or otherwise review state 
plans. We also reviewed relevant audit reports pertaining to each plan 
we contacted. Additionally, we interviewed representatives of the 
Pension Benefit Guaranty Corporation (PBGC) and the Federal Retirement 
Thrift Investment Board--two federal agencies which oversee large 
pools of invested assets--and reviewed relevant performance audits of 
these two agencies. We also interviewed private plan fiduciary experts 
and representatives of the Department of Labor's Employee Benefit 
Security Administration (EBSA), and PBGC's Office of Inspector 
General. To answer the third question, we interviewed relevant 
stakeholders--including representatives of the Board, Trust, and the 
Board's OIG--to discuss the benefits and drawbacks of policy options 
that could potentially enhance Trust audit and oversight. 

We conducted this audit from April 2013 to May 2014 in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient and 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

The Trust was established by statute as a tax-exempt entity to manage 
and invest the assets used to pay a portion of Railroad Retirement 
Program benefits. Congress anticipated that the Trust would be managed 
much like a private sector pension plan trust.[Footnote 6] The Trust 
is governed by seven trustees that, like trustees of multiemployer 
plans established through collective bargaining, include 
representatives of both management and labor. Three of the trustees 
are selected by railroad management, three by railroad labor, and one 
independent trustee is selected by the other six. The Trust may invest 
Trust assets in stocks, bonds and other investment vehicles in a 
manner similar to other defined benefit (DB) plans.[Footnote 7] While 
the Trust is not subject to the Employee Retirement Income Security 
Act of 1974 (ERISA),[Footnote 8] which governs private sector pension 
plans, its trustees are subject to fiduciary standards comparable to 
the fiduciary duties under ERISA.[Footnote 9] For example, each member 
of the Board of Trustees must act solely in the interests of the Board 
and, thereby, plan participants and beneficiaries; for the exclusive 
purpose of providing plan benefits and defraying administrative costs; 
with the care, skill, prudence, and diligence that a prudent person 
familiar with such matters would use; and diversify investments to 
minimize the risk of large losses and avoid disproportionate influence 
over any industry or firm.[Footnote 10] As of September 2013, the 
Trust held about $25 billion in assets, placing it among the 50 
largest DB plan trusts in the nation as of 2013.[Footnote 11] Trust 
assets consist mostly of equity and fixed income investments, but also 
include substantial assets allocated to alternative investments such 
as private equity, absolute return strategies, and commodities. 
[Footnote 12] From 2003 through 2013, according to a Trust 
representative, the Trust has had an average annual return on 
investment of about 6.4 percent. However, along with other plans, the 
Trust also suffered substantial investment losses during the financial 
crisis of 2008 and 2009. The Trust lost 19 percent in 2008 alone and 
suffered much lower losses in 2009 and 2011. 

The Trust operates in coordination with the Board, a federal agency 
established in 1937 to provide old-age pensions to retired employees 
of the nation's railroads.[Footnote 13] In 2013, the Board oversaw the 
payment of about $11.6 billion in retirement and survivor benefits to 
about 568,000 beneficiaries. The Board pays two types of benefits to 
retired workers and their spouses, which are funded through federal 
payroll taxes assessed on private railroads and their employees. Tier 
I benefits are calculated to be comparable to Social Security 
benefits, for which railroad retirees generally are not eligible. 
[Footnote 14] The Board also pays Tier II benefits, which are intended 
to provide a benefit similar to that of a DB plan.[Footnote 15] 
Benefits under Tier II are based on a worker's 5 years of highest 
earnings and the number of years spent in railroad employment. Assets 
not needed for immediate payment of Tier II benefits are invested by 
the Trust in accordance with its investment policy. 

The legislation creating the Trust includes language making it clear 
that the Trust is not part of the federal government. Specifically, 
the Trust is not a department, agency, or instrumentality of the 
federal government, and it is exempted from title 31 of the U.S. Code 
which governs the financial operations of the federal government and 
establishes the powers and duties of the U.S. Government 
Accountability Office.[Footnote 16] In addition, the Board is not 
represented on the Board of Trustees because the Board is a federal 
agency. However, as required by law, an independent qualified public 
accountant audits the Trust's financial statements each year.[Footnote 
17] It has been reported that these aspects of the Trust stemmed from 
concerns about government involvement in investment decisions that 
were repeatedly raised in Congress and elsewhere. It was reportedly 
feared, for example, that politically motivated investment decisions 
would lead to suboptimal investment returns and would provide 
political advantages to those influencing the decisions.[Footnote 18] 
Concerns about this “political risk” were of particular concern 
because the partial privatization of the much larger Social Security 
Trust Fund was a prominent public policy issue at the time.[Footnote 
19] These concerns led to a desire to eliminate even the appearance of 
possible political influence and significantly influenced the Trust’s 
current structure.[Footnote 20] 

While the Trust manages the pool of assets in a manner similar to that 
of a private or public sector traditional DB plan, it also differs 
significantly from such plans in certain ways. As figure 1 
illustrates, the Trust’s role is important but relatively narrow—its 
sole purpose is to manage and oversee the assets used to ensure 
payment of Tier II railroad retirement benefits. The Board assumes 
various other responsibilities of a DB pension plan, such as keeping 
track of benefit accruals and ensuring benefit payments. As a result, 
the Trust is a relatively small organization compared to the Board and 
pension plans of comparable size. While the Trust employs about 18 
staff, the Board, which has many other duties—including unemployment 
and sickness benefit programs—and regional offices around the United 
States, employs about 865. A public pension plan like the Pennsylvania 
State Employees’ Retirement System, whose assets under management are 
comparable to that of the Trust, employs about 200 staff.

Figure 1: Division of Key Responsibilities and Flow of Money between 
the Trust and Board Accounts at Treasury: 

[Refer to PDF for image: illustration] 

Treasury: 
* Collects payroll taxes from railroad employers and employees; 
* Holds accounts used to pay railroad retirement benefits; 
* Issues railroad retirement benefits; 
* Calculates Tier II tax rates, in cooperation with Board. 

Railroad Retirement Board: 
* Maintains earnings records and calculates benefits; 
* Assists railroad workers and families in filing claims for benefits; 
* Determines who is entitled to benefits and the amount of benefits; 
* Adjudicates benefit claims and authorizes benefit payments; 
* Provides direct technical assistance to employees and annuitants 
through 53 field offices; 
* Develops actuarial projections to predict future income and outlays 
from railroad retirement accounts, and thus determines the long term 
financial health of the railroad retirement system. 

National Railroad Retirement Investment Trust: 
* Develops long term investment strategy; 
* Implements and oversees long term investment strategy through 
professional staff and external asset managers. 

Treasury transfers money to Trust for investment ($21.3 billion 
between 2002-2004). The Trust has not received any subsequent 
transfers from Treasury. 

Trust transfers money to railroad retirement account at Treasury for 
benefit payments ($13.6 billion since end of 2002). 

Railroad retirement accounts: 
Railroad employers and employees make Tier II tax payments; Railroad 
retirees and survivors receive benefits issues by Treasury. 

Source: GAO representation of Board and Trust descriptive information. 

[End of figure] 

Other essential aspects of a typical DB plan, such as maintaining 
records of accrued benefits, providing technical assistance to 
participants, and authorizing and making benefit payments, are carried 
out by the Board or the Department of the Treasury (Treasury). In 
addition, the Board assumes responsibility for interacting with 
workers or beneficiaries as needed. The Trust is thus free of these 
responsibilities, and is able to focus on overseeing its invested 
assets. Table 1 compares the Trust and the Tier II program to typical 
public and private DB plans. 

Table 1: Comparison of Railroad Retirement Board Tier II Benefits to 
Public and Private Sector Defined Benefit (DB) Plan Benefits: 

Aspect: Organization and functions; 
Public and private sector DB plans: Make and manage investments, and 
typically perform other plan functions, such as tracking employee 
vesting and benefit accruals, paying benefits, and conducting or 
contracting for actuarial studies, etc; Trust and Tier II Railroad: 
Retirement Benefits: The Trust makes and manages investments for the 
Tier II benefits only; other duties are performed by the Board and 
Treasury. 

Aspect: Revenue stream; 
Public and private sector DB plans: Typically funded through employer 
contributions. Employees often contribute to public plans; Trust and 
Tier II Railroad: Retirement Benefits: Funded through federal payroll 
taxes levied on railroads and their employees. 

Aspect: Funding rules; 
Public and private sector DB plans: Forward funded: Plans are designed 
so that the present value of assets in a well-financed fund roughly 
equals the present value of expected future liabilities; Trust and 
Tier II Railroad: Retirement Benefits: Modified Pay as you Go: 
Designed so that Trust assets at any time will equal between 4 and 6 
years of current benefit payments. 

Aspect: Revenue adjustments; 
Public and private sector DB plans: Plan sponsors increase or reduce 
contributions depending on the financial health of the plan; Trust and 
Tier II Railroad: Retirement Benefits: Employer and employee payroll 
taxes are by law automatically adjusted in light of the goal of having 
a 4-6 year benefit cushion. 

Aspect: Coverage/membership; 
Public and private sector DB plans: A private sector single-employer 
plan generally covers employees of a single employer, and 
multiemployer plans cover employees that are party to a collective 
bargaining agreement with two or more employers; public sector plans 
cover public employees within a particular jurisdiction or unit of 
government; 
Trust and Tier II Railroad: Retirement Benefits: Covers employees of 
all private railroad firms. 

Aspect: Security net; 
Public and private sector DB plans: In the case of financially 
distressed private sector single-employer plans, PBGC can assume the 
assets and liabilities and pay some portion of benefits, and can 
provide assistance to help multiemployer plans pay a portion of 
benefits. Public sector plans may be backed by taxpayers and 
contributing employees; 
Trust and Tier II Railroad: Retirement Benefits: None for Tier II 
benefits. According to Board officials, railroad employers and 
employees are expected to make the necessary contributions, and if 
they are unable to do so, benefits are to be reduced. Tier I benefits 
are guaranteed by the Social Security Trust Fund. 

Source: GAO analysis of information GAO collected regarding the Trust, 
Tier II benefits, and public and private sector defined benefit plans. 

[End of table] 

Although the Trust does not have its own OIG, since the Trust's 
inception, the Board's OIG has repeatedly expressed concerns about the 
adequacy of Trust oversight. In November 2002, the OIG contacted the 
Trust's Chief Investment Officer to inquire about investment practices 
and the transfer of assets from Board accounts at Treasury to the 
Trust. The OIG requested written confirmation that transferred funds 
had been received, which investments had been purchased, and current 
investment yields. The Trust Chair responded by noting that the Trust 
transmits investment information in a statutorily-required annual 
report, as well as monthly reports pursuant to a memorandum of 
understanding with the Board, Treasury, and the Office of Management 
and Budget (OMB). In a subsequent correspondence, the Chairman noted 
that Congress had specified that the Trust was to be audited by an 
independent auditor, and delegated to the Board the responsibility to 
bring civil action if it believes the Trust is not complying with the 
statute. Since that time, the Trust has declined to provide any 
information directly to the OIG, although the Board has opted to share 
information pertaining to the Trust in some cases.[Footnote 21] In 
2008, the OIG issued a report expressing concern that the Trust's 
authorizing legislation provided the Board with a passive oversight 
role, and did not provide the Board with the ability to uncover 
circumstances requiring enforcement action.[Footnote 22] The report 
further noted limitations of annual financial statement audits, 
stating that such audits provide a "snapshot" of an organization's 
financial health at a point in time, are not equivalent to a 
performance audit, and cannot assess program performance compared to 
applicable criteria. The report concluded that the annual financial 
statement audit should be supplemented by performance audits, which 
can offer information about the effectiveness of internal controls, 
assess compliance with law, and assess the efficiency of recruitment 
and retention strategies. 

The overall importance of adequate oversight of pension assets has 
been highlighted in recent years by a number of incidents involving 
officials responsible for managing large pools of retirement assets. 
For example, in 2011, high ranking officials of a large state pension 
plan were implicated in practices that violated fiduciary and ethical 
duties. Specifically, they were found to have guided investments to 
certain middlemen known as "placement agents" in exchange for trips 
and other benefits, possibly to the detriment of beneficiaries. 
[Footnote 23] Similarly, in 2009, the PBGC Office of Inspector General 
(PBGC OIG) issued a report regarding a former PBGC Director's 
inappropriate involvement in contracting for investment services. 
Among other things, the PBGC OIG found that the former Director was 
communicating directly with some bidders at the same time he was 
actively considering their proposals, and so had clearly violated 
prohibitions against contact with potential service providers. 
[Footnote 24] 

As an entity established by federal law that invests or facilitates 
investing in the public markets the Trust is unusual, but not unique. 
PBGC operates an insurance program for single-employer DB plans that 
pays benefits (up to a statutory maximum) to retirees whose pension 
plans have been terminated.[Footnote 25] Financed by premiums paid by 
employers and returns on investment, this program operates a trust 
fund in which assets are also invested in stocks, bonds, and other 
investment vehicles with the aim of ensuring adequate funds to pay 
benefits. To manage this fund, PBGC has developed and implemented an 
asset allocation strategy comparable to DB plans. As of the end of 
fiscal year 2013, PBGC managed assets amounting to about $85 billion. 
Another agency--the Federal Retirement Thrift Investment Board 
[Footnote 26]--operates the Thrift Savings Plan (TSP), a defined 
contribution plan under which federal employees can save for 
retirement. The TSP offers a range of investment funds that invest in 
stocks, bonds, or both. Because the TSP requires participants to 
determine how their assets will be allocated, it differs from the 
Trust where the Board of Trustees determines how assets will be 
invested. At the end of fiscal year 2012, the TSP included assets of 
about $330 billion. 

Trust Oversight Includes Mandatory Reporting and Voluntary Periodic 
Performance Audits: 

The Trust Regularly Communicates with the Board and Other Federal 
Agencies: 

Under the law, the Trust must submit an annual management report to 
the Congress, President, Board, and Director of OMB. This report is 
required to address various matters pertaining to the Trust's 
administration and financial position.[Footnote 27] As table 2 
outlines, the most recent annual report contains information about the 
investment results, financial activity, operations and management. For 
example, the report includes a discussion of the evolution, current 
status and performance of the Trust's investment portfolio. It also 
includes a history of asset transfers and current book and market 
values.[Footnote 28] The report also includes a section on internal 
accounting and administrative controls including a description of the 
custodial arrangements under which Trust assets are primarily in the 
custody of a custodial bank, as well as the custodian's responsibility 
to provide the Trust with a full record of all transactions involving 
Trust assets. The Annual Management Report also includes relevant 
Trust policies such as Trust by-laws, investment guidelines, and a 
conflicts of interest policy statement. In addition to Annual 
Management Reports, the Trust also submits monthly and quarterly 
reports to the Board. The monthly reports include financial 
information such as information on the purchase and sale of federal 
and non-federal securities, the monthly cash balance, and aggregate 
administrative expenses. Quarterly reports include a summary of 
investment objectives, quarterly investment returns, and aggregate 
asset values. 

Table 2: Trust Annual Management Report Contents: 

Information: Administrative matters; Annual Management Report Contents: 
* Coordination with federal government agencies; 
* Audit committee activity; 
* Description of internal accounting and administrative controls; 
* Administrative costs, including investment manager fees. 

Information: Financial transactions and management; Annual Management 
Report Contents: 
* Summary of transfers from Trust to Treasury; 
* Year-end account benefits ratio; 
* Summary of cash flows and changes to Trust assets; 
* Financial statements and independent auditor's report. 

Information: Investments strategy and management; Annual Management 
Report Contents: 
* Description of long term asset allocation; 
* Overview of investment manager hirings and terminations, by asset 
class. 

Information: Other; 
Annual Management Report Contents: 
Appendices include various documents and policies, including: 
* investment guidelines; 
* conflicts of interest policy; 
* publication of new Tier II tax rates; 
* audit and administrative committee charters. 

Source: GAO review of Trust annual reports. 

[End of table] 

Under the terms of a memorandum of understanding with three federal 
agencies, the Trust also submits a monthly report to the Board. 
[Footnote 29] The memorandum states that because the Board is 
responsible for the overall management of the Railroad Retirement 
System, it is responsible for all budgetary and proprietary reporting 
of Trust transactions. Consequently, as table 2 describes, the Trust 
must submit information on investment and other transactions to the 
Board, and may do so on a 1-month delayed basis. The Board then uses 
this information to prepare monthly financial reports submitted to 
Treasury. 

In addition to reviewing these reports, Board and Trust officials 
stated that the organizations conduct regular formal meetings. In 
addition, the Board, in cooperation with the Trust, receives and 
reviews communications and information throughout the year. Board 
officials explained that Board members and trustees meet face-to-face 
twice annually, during which the Board receives a presentation on 
economic, legal, and other issues that could affect the Trust and its 
investments. The presentation may also include a detailed discussion 
of investment performance and outlook by asset class. A Board official 
said that such meetings typically include a question and answer 
session. These meetings are supplemented by quarterly conference calls 
between Trust and Board financial and legal staff in which investment 
performance, ongoing audits, or other issues are discussed. 

Board officials indicated that, after more than 10 years of experience 
working with and overseeing the Trust, they saw no need for enhanced 
oversight, noting that these reports and communications effectively 
provide continuous oversight, and in the event of a participant 
complaint, the Board would stand in for a claimant's interest and take 
action in the event of malfeasance or mismanagement. Further, Board 
and Trust representatives told us that the Trust has never declined to 
share information that the Board has requested. Based on this working 
relationship, Board officials stated they believe they would be aware 
of any cause to file a lawsuit under the statute. 

The Trust Has Commissioned Periodic Performance Audits Since 2002, but 
Has Not Established a Formal Policy for Such Audits: 

While not required by law to do so, the Trust has commissioned four 
performance audits since the Trust was organized in 2002. As table 3 
illustrates, these audits have occurred roughly every 2 to 3 years, 
and have covered a wide range of issues from technical compliance with 
the terms of the MOU between the Board, OMB, and Treasury, to the 
Trust's approach to non-traditional investments such as hedge funds 
and private equity. 

Table 3: Overview of Scope and Objectives of Trust Performance Audits: 

Subject category: Financial controls and reporting; 2004: Review of 
selected Trust systems and processes: 
* Verify reconciliation of monthly reports with Trust financial 
statements; 
* Verify that unauthorized investments, transactions or expenditures 
are not processed; 
* Verify timely recording of funds receipt and transfer; 2006: 
Internal risk assessment[A]: 
* Risk of untimely submittal of required annual reports and failure to 
submit monthly reports; 
* Risk of inaccurate calculation or reporting of portfolio values; 
2009: Operations review: 
* Assess investment performance reporting; 
* Assess Trust and custody arrangements; 
* Review investment accounting policies and practices; 2012: Internal 
financial control assessment: 
* Evaluate Trust policies and procedures regarding financial controls. 

Subject category: Selection and oversight of external investment 
managers; 
2004: Review of selected Trust systems and processes: 
* Adherence to investment manager hiring policies; 2006: Internal risk 
assessment[A]: 
* Risk of failure to perform due diligence in selecting investment 
mangers; 
* Risk of asset managers' failure to comply with investment management 
guidelines; 
2009: Operations review: 
* Assess due diligence procedures; 
2012: Internal financial control assessment: [Empty]. 

Subject category: Investment strategy, performance, and practices; 
2004: Review of selected Trust systems and processes: [Empty]; 2006: 
Internal risk assessment[A]: 
* Risk of unclear investment performance objectives and metrics; 
* Risk of unexpected market volatility; 
* Risk that illiquid assets prohibit divesture to meet cash 
obligations; 
2009: Operations review: 
* Review of non-traditional investment practices, including hedge 
funds, private equity, commodities, and private real estate; 2012: 
Internal financial control assessment: [Empty]. 

Subject category: Qualifications and compensation of trustees and 
staff; 
2004: Review of selected Trust systems and processes: [Empty]; 2006: 
Internal risk assessment[A]: 
* Risk that staff compensation structure may drive inappropriate 
behavior or fail to attract and retain good performers; 2009: 
Operations review: [Empty]; 
2012: Internal financial control assessment: [Empty]. 

Subject category: Plan operations (non-investment); 2004: Review of 
selected Trust systems and processes: 
* Ensure disaster recovery plan is in place; 2006: Internal risk 
assessment[A]: 
* Risk that staff are insufficient to manage back office operations; 
2009: Operations review: [Empty]; 
2012: Internal financial control assessment: [Empty]. 

Source: GAO review of Trust performance audit reports. 

[A] The 2006 internal risk assessment sought to examine 19 specific 
risk areas. This table includes selected examples. 

[End of table] 

These performance audits varied considerably in subject matter and 
breadth. For example, the 2004 audit, conducted by the internal audit 
departments of two railroad firms, sought to ensure that various core 
functions, including financial reporting functions, were in place and 
operating as intended. In contrast, the 2009 review sought to examine 
various aspects of investment related practices, for which a railroad 
internal audit department would not likely have sufficient expertise. 
Instead, according to a Trustee, the Trust hired a consulting firm 
that it believed to have considerable expertise in investment strategy 
and management. This report went into some detail about the nature and 
management of the Trust's alternative investments such as hedge funds 
and private equity, and examined the Trust's "due diligence" 
procedures regarding the search for investment managers and ongoing 
manager oversight. 

Each report contained recommendations and, according to Trust 
documents, the Trust either implemented, committed to implement, or 
explained why it would not implement each recommendation. In at least 
one instance, the Trust has not pursued the auditor's recommendations. 
Specifically, while the 2006 internal risk assessment generally found 
few gaps in Trust processes and controls of risk, the auditor also 
proposed a second audit phase to explore a number of issues more 
deeply.[Footnote 30] According to a Trust representative, the Trust 
audit committee opted not to commit to the significant cost of this 
second phase, since the risk analysis found only a few "gaps" out of 
the 19 areas evaluated, and because the Trust either took corrective 
action or determined that the Trust's existing policies sufficiently 
addressed the concern.[Footnote 31] Since that time, some of the 
specified issues have been addressed in subsequent reviews, but others 
have not. For example, the audit proposed a more in-depth review of 
recruiting, staff compensation, and organizational culture, but the 
Trust has not followed up with an audit of these issues. 

Although Trust representatives indicated that they intended to 
continue the practice of periodic performance audits, the Trust does 
not have a written policy regarding performance audits, their 
frequency, or their subject matter. For example, the Trust's Audit 
Committee Charter specifically assigns the Committee responsibility 
for, among other items, 1) retaining and working with the independent 
financial auditor, 2) overseeing the Trust's conflict of interest and 
confidentiality policies, and 3) overseeing Trust staff compliance 
with the MOU. However, the charter is silent on performance audits. 
[Footnote 32] 

Recently, a second MOU--developed between the Trust and the Board--has 
been drafted that would formalize the practice of commissioning 
periodic performance audits. Under a draft MOU, starting in 2015, 
performance audits would be performed at least every 3 years, in 
consultation between the Trust and the Board. The document also lists 
12 areas that would be appropriate subjects of the audits, and 
provides that the Trust and the Board would meet to review the audit 
results and assess what changes to Trust practices or procedures would 
be warranted. However, the document does not include some audit 
subjects, such as fiduciary responsibility and conflict of interest 
policies, and does not specify timeframes for addressing particular 
areas subject to audit. 

Performance Audit Practices of Comparable Entities Can Differ from the 
Trust in Scope and Frequency: 

Most Comparable: 

Entities Are Subject to Multiple Levels of Performance Audits, but the 
Nature and Frequency of Reviews May Vary: 

Subject to Independent External Auditors: 

Unlike the Trust, most state plans and both federal programs we 
contacted are subject to performance audits that can be initiated and 
conducted by an independent entity. As figure 2 shows, 42 of the 50 
state plans we contacted are subject to external audits conducted by 
the states' Auditor General or a comparable entity with authority to 
audit or otherwise review them. External audits of these plans can be 
initiated and conducted independent of the plans' governing board and 
management. The remaining 8 of these 50 state plans are not subject to 
external audit. Plan officials in these 8 states stated that oversight 
can be achieved in other ways, such as through the preparation of 
publicly available reports as well as through board of trustee and 
legislative oversight.[Footnote 33] 

Figure 2: Trust, State, and Federal Performance Audit Practices: 

[Refer to PDF for image: illustration] 

Performance audits initiated and conducted by an external independent 
entity: 

Yes: 
42 states; 
2 federal programs. 

No: 
8 states; 
1 National Railroad Retirement Investment Trust. 

The number of external entities that can initiate audits of state 
plans or federal programs: 

0: 
8 states; 
1 National Railroad Retirement Investment Trust. 

1: 
29 states; 

2: 
10 states; 
2 federal programs. 

3: 
3 states. 

Federal programs: PBGC & TSP. 

Source: GAO analysis of select Trust, state, and federal performance 
audit practices. 

Note: While Trust officials may commission external firms to conduct 
periodic performance audits, such audits cannot be initiated by an 
independent external entity. 

[End of figure] 

Two federal programs that oversee large asset pools for the benefit of 
retirees and their beneficiaries are also subject to independently 
initiated performance audits. For example, PBGC's single employer 
insurance program is subject to OIG audits and TSP is subject to 
Employee Benefit Security Administration (EBSA) audits. 

While the large majority of state and federal officials noted the 
importance of performance audits conducted by an independent external 
entity, officials of some state plans subject to audit noted potential 
drawbacks as well. A plan official in one state said auditors should 
be independent because they need to be unbiased, and conduct their 
work without influence. An EBSA official stated that given the value 
of TSP's asset holdings, they would be concerned if EBSA was not able 
to initiate an audit to examine program areas they felt warranted 
closer review. Nonetheless, a plan official in one state said the plan 
resisted such audits in part out of a concern for politically 
motivated reviews and a perceived lack or expertise in investment 
matters. The official explained that the Auditor General's office was 
seen as a stepping stone to the governorship, and that plan officials 
were concerned that audits could be used for political purposes. 
According to the official, when a state court ruled that the Auditor 
General had the power to initiate an audit, plan officials 
commissioned an external firm in 2006 to conduct a separate review so 
state legislators could consider the findings of both audits.[Footnote 
34] 

Number of Independent External Auditors: 

In contrast to the Trust, several state and both federal programs we 
contacted are subject to multiple audits initiated by independent 
agencies. As indicated in figure 2, 13 of 50 state plans can be 
reviewed by two or more entities. In one state for example, the plan 
is subject to review by three state agencies: the Auditor General, a 
legislative oversight agency, and the state's Inspector General. In 
some cases, state oversight agencies do not conduct audits but monitor 
investment strategy and activities in other ways. For example, one 
state's legislative oversight committee informs and advises the 
legislature about different investment options for pension assets. 
Both federal programs we contacted are also subject to audit by 
multiple agencies. As noted above, PBGC is subject to audit by its 
OIG, and TSP is subject to audit by EBSA. In addition, unlike the 
Trust, both are subject to GAO's audit jurisdiction. 

Frequency of External Performance Audits: 

As illustrated in figure 3, the frequency with which the Trust has 
commissioned performance audits is comparable to or exceeds most state 
efforts. Unlike the Trust, 29 of the 50 state plans we contacted are 
subject to external audits on a specific calendar cycle. While 14 of 
the 42 state plans are subject to quarterly or annual external audits, 
most state plans are audited about as frequently as or less so than 
the Trust. For instance, similar to the Trust, nine state plans are 
audited at least once every 2 or 3 years. The remaining 19 state plans 
were subject to audits at longer set intervals that varied from state 
to state or were not reviewed according to any established time frame. 

Figure 3: Frequency of External Performance Audits: 

[Refer to PDF for image: vertical bar graph] 

Quarterly: 
State plans: 1. 

Annually: 
State plans: 13. 

Every 2 to 3 years: 
State plans: 9; 
National Railroad Retirement Investment Trust: 1. 

Between 5 and 11 years: 
State plans: 6. 

No established time frame: 
State plans: 13. 

Source: GAO analysis of select Trust and state performance audit 
practices. 

[End of figure] 

While the Trust had not established time frames for periodic reviews 
of any topic, in some states, external auditors are required to review 
certain topics within specified intervals. In one state, the Auditor 
General conducts a performance audit every 2 years focusing on plan 
operations while a second state agency audits the plan's investment 
strategy, performance, and practices every other year. In another 
state, a state agency is required to conduct an audit every 3 years 
related to investment strategy, performance, and practices as well as 
ethics and conflicts of interest. The most recent of these audits 
assessed whether fiduciaries act for the sole benefit of participants, 
and whether the highest ethical practices were being upheld. Plan 
officials in this state stated that the requirement is relatively new, 
resulting from allegations that investment firms made improper 
payments to politically connected intermediaries in exchange for 
managing the investment of state pension assets. 

Internal Audit Offices: 

Thirty-seven of the 50 plans we examined report being subject to 
performance audits by an office of internal audit located within the 
plan itself. In 32 of these plans, internal audits supplement external 
audits, but in 5 others, the office of internal audit is the only 
entity that conducts performance audits. According to plan officials, 
internal audits are typically conducted on an ongoing basis in 
accordance with an annual audit plan, and are conducted with a 
significant degree of independence. For example, plan officials in two 
states stated that, although the board of trustees must formally 
review and approve their annual audit plan, trustees do not influence 
what internal auditors should or should not review. One plan official 
said that such independence is important because--if problems or 
malfeasance were occurring--the board of trustees might try to divert 
the focus of these reviews. Nonetheless, an official of one state plan 
that, like the Trust, solely manages and invests pooled pension 
assets, told us that given their relatively small size, an office of 
internal audit would not be appropriate. Instead, the official said 
they plan to retain a third party firm to conduct a broad-based risk 
assessment related to the plan's investment allocations. 

State and Federal Audits Cover Certain Areas Not Included in Trust 
Reviews: 

Trust performance audits are comparable to state and federal audits in 
terms of the breadth of topics reviewed. We examined relevant 
performance audit reports of plans in seven selected states and two 
federal entities and compared these to the four audits the Trust has 
commissioned. Our examination indicated that the range of topics the 
Trust has reviewed included some topics that state or federal audits 
have not included, and in some cases Trust audits addressed topics in 
more detail. For instance, as shown in table 4, unlike TSP and four 
states, a Trust audit included a review related to the qualifications 
and compensation of its Board of Trustees and Trust staff. Further, 
Trust audits of some topics have been more detailed than those of some 
state audits. For instance, the Trust's 2009 audit included an 
assessment of its practices for selecting and monitoring external 
investment managers, as did several state audits. However, the Trust 
audit also assessed the Trust's practices for terminating contracts 
based on the performance of external investment managers which one 
state audit did not include. Table 4 lists broad audit topics and 
indicates whether the Trust, state plans, and federal agencies have 
conducted related reviews. 

Table 4: Subject Categories of Selected State, Federal, and Trust 
Internal and External Performance Audits: 

Subject category: Financial controls and reporting; Trust: [Check]; 
PBGC: [Check]; 
TSP: [Check]; 
State 1: [Check]; 
State 2: [Check]; 
State 3: [Check]; 
State 4: [Check]; 
State 5: [Check]; 
State 6: [Check]; 
State 7: [Check]. 

Subject category: Selection and oversight of external investment 
managers; 
Trust: [Check]; 
PBGC: [Empty]; 
TSP: [Check]; 
State 1: [Check]; 
State 2: [Check]; 
State 3: [Check]; 
State 4: [Check]; 
State 5: [Check]; 
State 6: [Empty]; 
State 7: [Check]. 

Subject category: Investment strategy, performance, and practices; 
Trust: [Check]; 
PBGC: [Check]; 
TSP: [Check]; 
State 1: [Check]; 
State 2: [Check]; 
State 3: [Empty]; 
State 4: [Check]; 
State 5: [Check]; 
State 6: [Check]; 
State 7: [Check]. 

Subject category: Ethics and conflicts of interest; Trust: [Empty]; 
PBGC: [Check]; 
TSP: [Check]; 
State 1: [Check]; 
State 2: [Check]; 
State 3: [Empty]; 
State 4: [Check]; 
State 5: [Check]; 
State 6: [Check]; 
State 7: [Check]. 

Subject category: Qualifications and compensation of board and staff; 
Trust: [Check]; 
PBGC: [Check]; 
TSP: [Empty]; 
State 1: [Empty]; 
State 2: [Empty]; 
State 3: [Empty]; 
State 4: [Check]; 
State 5: [Empty]; 
State 6: [Check]; 
State 7: [Check]. 

Subject category: Plan operations (non-investment); Trust: [Check]; 
PBGC: [Check]; 
TSP: [Check]; 
State 1: [Check]; 
State 2: [Check]; 
State 3: [Check]; 
State 4: [Check]; 
State 5: [Check]; 
State 6: [Empty]; 
State 7: [Check]. 

Subject category: General compliance; Trust: [Empty]; 
PBGC: [Check]; 
TSP: [Check]; 
State 1: [Check]; 
State 2: [Empty]; 
State 3: [Check]; 
State 4: [Check]; 
State 5: [Check]; 
State 6: [Check]; 
State 7: [Check]. 

Source: GAO examination of selected Trust, state, GAO, and other 
federal audit reports. 

Note: Our examination included relevant performance audit reports of 
plans in seven selected states and two federal agencies issued since 
2008. For two states, we included reports published in 2006 and 2007 
because they were the most recent. We then compared the topics 
reviewed in these reports to those included in each of the four audits 
the Trust has commissioned since 2002. State pension plans or federal 
agencies may take important steps regarding the subjects listed above 
outside the scope of a performance audit. For example, state plans may 
periodically commission consultants to assist in developing or 
adjusting investment policy or compensation structures. Also, some 
matters, such as Board membership and compensation may be established 
in law, and so may not be matters a performance audit would examine. 

[End of table] 

Conversely, some state and federal performance audits have included 
findings on topics that Trust audits have not included, or addressed 
topics in more detail. As table 4 indicates, two federal and six state 
entities have audited plan ethics and conflicts of interest policies 
and practices whereas the Trust audits have not. In some cases, such 
reviews have resulted in findings and recommendations in areas that 
could be relevant to the Trust. For instance, one state audit found 
that the plan did not have a process to independently identify 
potential conflicts of interest. Several states have also conducted 
audits that solely assessed whether the plan was in compliance with 
law and plan policies whereas the Trust has not. Although limited in 
scope, officials in one state said these types of reviews have 
identified issues such as conflicts of interest and the misuse of 
state funds. Finally, while a 2006 Trust audit considered 
qualifications and compensation of the Board of Trustees and Trust 
staff as part of a broad risk assessment, some state audits examined 
this issue in more detail. For example, a Trust audit considered the 
risk that improper compensation of staff would drive inappropriate 
behavior or limit ability to attract and retain staff. The review 
found that the Trust has processes and controls in place to address 
this concern, including a staff handbook and an annual review for each 
employee. In contrast, an audit of a state plan appeared to encompass 
more, finding that while the plan has a consistently high quality 
investment staff, it has relatively low staffing levels in several 
asset classes, a tendency to leave vacancies unfilled for many months, 
and underdeveloped and underutilized human resources. As a result, the 
fund has had to make more extensive use of external consultants, 
which, according to the audit report, resulted in higher costs to the 
plan. 

According to Experts, the Trust's Performance Audit Practices Are 
Similar to Those of Large Private Sector Plans: 

According to experts on private sector pensions, the Trust's practice 
of commissioning external firms to conduct performance audits every 2 
to 3 years is comparable to the practices of large private sector 
plans. While such plans are generally not subject to independently- 
initiated audits, fiduciary experts stated that large private sector 
DB plans commission periodic audits that are typically conducted by 
external consulting firms. In discussing the Trust's current practice 
of commissioning audits every 2 to 3 years, one investment fiduciary 
expert said that this is similar to many large private sector plans. 
Experts indicated that such audits are fairly common among large 
pension plans, but that smaller plans--those managing assets of fewer 
than $100 million--do not typically commission these reviews. One 
expert stated that smaller plans may have a more difficult time 
justifying the use of the resources necessary to commission 
performance audits. Nonetheless, where resources are available, 
experts said that audits can be beneficial to a plan's trustees and 
management. For instance, one expert said these reviews help ensure 
the plan is complying with all reporting and disclosure requirements. 

In addition to periodic audits, private plans are also subject to 
potential external review by ERISA enforcement agencies. To enforce 
the fiduciary standards established in ERISA,[Footnote 35] for 
example, EBSA may review private sector plans to ensure officials are 
in compliance with ERISA standards[Footnote 36] and, like plan 
participants and others, take civil action[Footnote 37] to enforce 
compliance.[Footnote 38] While not subject to ERISA, the Trust's 
authorizing legislation includes similar fiduciary standards[Footnote 
39] and the Trust is subject to potential civil action by the Board 
for violations of law.[Footnote 40] While such action is possible, 
Board officials stated that the Board has never had cause to take such 
action. 

Key Parties Noted Tradeoffs with Expanded Trust Oversight: 

Key Parties Disagreed about Need and Extent of Additional Oversight: 

The Board's OIG officials emphasized their long-held belief that the 
current level of oversight is inadequate, and that the Trust should be 
subject to more rigorous performance audits.[Footnote 41] In a 2011 
report, the OIG stated that without stricter accountability, 
transparency, and oversight on issues such as administrative expenses 
and overall financial health, the Trust runs the risk of fraud, waste 
and abuse.[Footnote 42] Further, according to the OIG, there is no 
comparable example where federal program assets are completely outside 
the jurisdiction of a federal agency's appointed Inspector General. 
OIG officials told us that the Board can take enforcement action if it 
believes the Trust is not in compliance with its founding legislation, 
but that without more transparency, fraud or mismanagement would be 
difficult to detect. The OIG maintained that an external organization 
should have oversight authority so that it can independently verify 
Trust reports. The OIG added that--despite explicit statutory language 
making it clear that the Trust is not an agency of the federal 
government--the Trust's control of about $25 billion in federal 
government assets makes its status as a non-governmental organization 
somewhat illogical, and that it should be subject to greater 
oversight. The official added that if the railroad industry fell on 
hard times and the Trust was unable able to make benefit payments, 
industry officials would likely need to seek federal financial 
assistance. 

Both Trust and Board representatives stated that, in their view, the 
current oversight is adequate, citing annual mandatory financial 
audits, regular reporting and communications between the Board and 
Trust, and voluntary periodic Trust-commissioned performance audits. 
Also, officials cited the statutory "tax ratchet", which raises or 
lowers the Tier II employer and employee tax rate to ensure that the 
Trust assets equal between 4 and 6 years of expected benefit payments. 
Officials noted that this mechanism both ensures that the Trust's 
financial position will not unduly deteriorate so long as there is a 
viable railroad industry in the United States to pay required taxes, 
and ensures that railroad labor and management have a self interest in 
overseeing a financially healthy Trust. 

Selected representatives of railroad management and labor generally 
concurred with Board and Trust officials. For example, representatives 
of the Association of American Railroads--an organization representing 
U.S. railroads--stated that they did not have concerns about the 
Trust's current oversight structure. Similarly, an official of the 
Brotherhood of Maintenance of Way Employees indicated that the Trust 
is doing well financially, and did not have concerns with regard to 
Trust oversight because the Trust is quite transparent, and labor 
organizations are able to obtain periodic reports. 

Stakeholders Identified Important Tradeoffs with Enhanced Trust 
Oversight Policy Options: 

Based on discussions with experts and key stakeholders, as well as our 
review of oversight models that apply to large state plans, private 
sector plans subject to ERISA, and comparable federal entities, we 
identified four possible policy options for expanding Trust oversight. 
We spoke with key stakeholders about these policy options and 
solicited their views on the potential benefits and drawbacks of each. 
Table 5 summarizes stakeholder views on these policy options. 

Table 5: Possible Policy Options for Enhancing Trust Oversight: 

Policy option: Permit OIG audits; 
Potential benefits: Ensures performance audits are independently 
initiated and conducted; 
Potential drawbacks and other considerations: Could require statutory 
change; 
concerns exist about working relationships; could impose additional 
cost on government. 

Policy option: Require periodic audits with external input on scope; 
Potential benefits: Ensures Trust-commissioned performance audits do 
not cease and provides influence external to Trust; Potential 
drawbacks and other considerations: None identified by stakeholders. 

Policy option: Establish external investigative authority; Potential 
benefits: Subjects Trust to oversight in event of complaint or 
allegation; 
Potential drawbacks and other considerations: Trust has little to no 
interaction with beneficiaries, so complaints might be rare; could 
require statutory change. 

Policy option: Establish office of internal audit; Potential benefits: 
Ensures performance audits are independently initiated and conducted; 
Potential drawbacks and other considerations: Benefits might be 
outweighed by additional cost of such a unit. 

Source: GAO analysis of stakeholder views and other data. 

Note: The primary focus of our work was on possible policy options. We 
also solicited stakeholder input on the mechanisms--statutory or 
otherwise--by which the options could be implemented. 

[End of table] 

Permit OIG Audits: 

An OIG official told us that, in their opinion, this would be the most 
logical option because the Trust controls Board assets and the OIG is 
responsible for overseeing the Board. However, the official noted that 
the OIG has limited staff, and that such authority would require 
additional staff resources. To make this option more agreeable to the 
Trust, an OIG official said that any necessary statutory language 
could clearly delineate what the OIG's role would and would not be. 
The official said the OIG would seek to verify that there are proper 
checks and balances in place and to assess internal controls. The 
official stated the OIG would not seek to advise the Trust on 
investment policy, which is beyond the OIG's area of expertise. 

However, representatives of the Trust and the Board that we contacted 
were unanimously opposed to such a proposal. Board officials stated 
that such a development would be counter to the Trust's originating 
legislation, and one official stated that externally-initiated audits 
could open the door to political influence, stating that audit 
objectives could be framed in a way that would pressure the Trust's 
investment policies in a particular direction. For example, an audit 
could be designed to review "politically incorrect" investments, or 
investments that might be portrayed as not environmentally conscious. 
Similarly, a Trustee expressed concern about "headline risk", where an 
outside auditor might make an issue about the Trust's investments in 
alternative investments such as private equity. Trust representatives 
also expressed concerns about what they perceived as an 
unconstructive, confrontational relationship with the OIG. One 
official said this has been manifest in a number of ways since the 
Trust was established, including on matters relating to investment 
management and returns. A Trust official noted that the OIG has 
commented on Trust investments and related issues, and said that 
should the OIG be granted authority to audit the Trust, such concerns 
could result in an audit that would influence Trust investments. The 
official added that the Trust has a professionally developed 
investment strategy, and does not wish to take advice about 
investments or about its selection of investment advisors from the OIG 
or any other government agency. 

Also, as summarized below, Trust officials noted that the OIG's stance 
with regard to the Statement of Social Insurance (SOSI) has led them 
to undertake a costly and, in their view, unnecessary second audit of 
their financial statements each year. An OIG official told us that 
because the SOSI is included in Board financial statements, in their 
view the audit of the December 31 asset values is necessary based on 
OMB guidance. The official further noted that while the difference in 
the value of Trust assets between September 30 and December 31 is 
generally not large, in 2008 there was an 18 percent difference. 

Text box: 

Disagreement over Audit Related to Statement of Social Insurance: 

Background: 

U.S. generally accepted accounting principles require federal agencies 
charged with responsibility for selected federal social insurance 
programs such as the Railroad Retirement, Social Security and Medicare 
programs--to present the Statement of Social Insurance (SOSI) as a 
basic financial statement in their respective annually audited 
financial statements. The SOSI presents the projected actuarial 
present value of the estimated future revenue and estimated future 
expenditures of these social insurance programs over 75 years. In 
preparing its annual SOSI for the Railroad Retirement program, the 
Board considers projections of employment levels, economic factors, 
and demographic factors such as mortality rates, widow remarriage 
rates, retirement rates, as well as current asset values provided by 
the Trust. The Department of the Treasury has cautioned that the 
assumptions used to prepare SOSI's are inherently subject to 
substantial uncertainty, and that depending on future events, there 
will be differences between the SOSI estimates and actual results. 

OIG Action: 

In 2006, the OIG informed the Board that it would not provide an 
unqualified opinion on its financial statements if the Board continued 
to accept unaudited December 31 asset values from the Trust. The Board 
then requested that the Trust pay for an audit of the December 31 
asset values. 

Trust Position: 

A Trust official stated that this is unnecessary because Trust assets 
are audited at the end of the Trust's fiscal year--September 30. 
Further, the Trust noted that the variance between audited December 31 
and unaudited December 31 values are invariably quite small--averaging 
about .12 percent and never exceeding ½ of 1 percent. According to a 
Trust official, the various assumptions made by the Board actuary in 
preparing the SOSI have much more impact on the projections than the 
difference between the audited and unaudited asset values. 

Impact: 

According to the Trust, the additional audit is also wasteful--costing 
$152,000 in 2013 and a total of about $1.6 million since 2005. 

[End of text box] 

Finally, Board and Trust officials indicated that the OIG would not 
have sufficient expertise to conduct performance audits of the Trust. 
One official noted that the internal audit departments of two railroad 
firms were hired for the first audit that covered various 
administrative issues. However, Trust officials decided that these 
auditors would not have the expertise to conduct subsequent reviews, 
the scope of which required greater knowledge of investment 
management. Instead, the Trust opted to hire private consulting firms 
with recognized expertise in the relevant subject matter. For the same 
reason, a Trust official contended that OIG lacks the expertise to 
conduct these audits. 

Require Periodic Audits with External Input on Scope: 

Key stakeholders--including Board and Trust officials--generally 
supported this option. The Trust does not have a formal policy 
regarding the frequency or subject matter of its performance audits, 
or a policy regarding obtaining external advice on the subject and 
scope of such audits. However, one trustee stated that, while the 
Trust has every intention of continuing the practice of conducting 
periodic audits, they would be amenable to formalizing this process. 
An OIG official also generally supported this idea, but had previously 
stated that reviews every 3 years would not be sufficient, and that 
more ongoing oversight is needed. Board and Trust officials were also 
supportive of the Board serving in an advisory role with regard to 
such audits. 

Recently, the Trust and the Board have been developing a memorandum of 
understanding (MOU). According to a draft version of this MOU, 
starting in 2015, performance audits would be performed at least every 
3 years based on mutual agreement between the Trust and the Board. The 
draft MOU also lists 12 areas that would be appropriate subjects of 
such audits, and provides that the Trust and the Board would meet to 
review the results and assess what changes to Trust practices or 
procedures are warranted. However, the draft MOU does not mention some 
audit subjects, such as fiduciary responsibility and conflicts of 
interest policies, and does not specify that key subjects should be 
addressed within specified timeframes for addressing particular areas 
subject to audit. 

Establish External Investigative Authority: 

Larger private sector DB plans have, according to experts we 
contacted, performance audit practices resembling those of the Trust. 
However, in response to participant complaints or other information, 
such plans are also potentially subject to EBSA investigations. As we 
have previously reported, EBSA does not conduct routine compliance 
audits, but rather investigators rely on various sources for case 
leads, such as staff reviews of plan annual reports or media reports, 
participant complaints, or referrals from other agencies.[Footnote 43] 
As noted previously, the Board can bring a civil action against the 
Trust for violations of law. Trust officials are subject to fiduciary 
standards similar to those under ERISA, and are prohibited from 
transactions in the trustees' own interest, or receiving any benefit 
from any party dealing with Trust assets. However, the Trust's 
authorizing statute does not provide for any mechanism other than a 
lawsuit with regard to a violation. 

Trust officials stated that establishing an external investigative 
authority might have limited benefits because railroad retirees and 
survivors do not interact with the Trust in the same way that retirees 
interact with a DB plan. A Trust representative noted that because the 
Trust's sole duty is to manage the assets pertaining to Tier II 
benefits, it does not have responsibility for determining benefit 
levels, making benefit payments, or the other matters about which a 
pension plan may communicate with beneficiaries. According to Board 
representatives, workers taking issue with some aspect of Trust 
management or actions would likely contact the labor representative on 
the Board, and management officials would likely contact the Board's 
management representative. 

Establish Office of Internal Audit: 

An office of internal audit is common in state plans, but according to 
stakeholders, the Trust may be too small an organization to justify 
such a unit. The majority of the state plans were subject to audits 
conducted by an internal audit department. Internal auditors generally 
conducted audits on an ongoing basis, following a routine audit plan. 

Both Board and Trust officials stated that, given the small size of 
the Trust's staff, an office of internal audit would not be suitable. 
One Trust representative noted that, if the Trust was comparable in 
size to a large public pension plan, establishing an internal office 
would make some sense. However, he noted that the Trust employs few 
staff, and investment management is entirely carried out by external 
firms. The official stated that such an entity would need considerable 
skill--including in-depth expertise in investment, accounting, and 
financial controls--and such a professional would likely command a 
much higher salary than the Trust would be willing to pay for someone 
who would have limited responsibility for most of the year. A trustee 
also expressed concern about the substantial cost of such a position 
given that there would not be much for them to do most of the time. 

A representative of the OIG stated that establishing an internal 
compliance officer or auditor is a reasonable idea, but expressed 
concern about the operational independence of such a position. This 
official was not familiar with the status of internal audit offices 
within public pension plans, but indicated that such an office would 
need to be independent of management and Trustees, just as the OIG is 
independent of the Board. 

Statutory Amendment or Administrative Agreement: 

With respect to the policy options we discussed with stakeholders, 
Trust and Board officials stated that they would prefer any changes be 
established through an interagency agreement such as an MOU as opposed 
to a statutory amendment.[Footnote 44] Representatives of the Trust 
and the Board strongly preferred to avoid a statutory change. Trust 
representatives explained that any statutory amendments would offer 
less flexibility and opportunity for modification than would an 
administrative agreement such as an MOU. Further, Trust and Board 
officials expressed concern that the process of a statutory change 
might bring unexpected and disruptive consequences. For example, once 
begun, industry or labor might use the legislative process to impose 
additional amendments, which could cause unnecessary strife. An OIG 
official noted advantages and drawbacks to both options, noting for 
example that while the statutory option could be more difficult to 
achieve, it would have the benefit of greater permanence, since the 
Trust could not legally opt to discontinue new oversight practices. 

Concluding Observations: 

The National Railroad Retirement Investment Trust manages a $25 
billion pool of federal assets that are critical to providing 
retirement benefits for railroad workers and their families. To 
protect these assets--and the entity that manages them--from political 
influence, the Trust was established independent of the federal 
government and explicitly exempted from the title 31 of the U.S. Code, 
which governs the financial operations of the federal government and 
establishes the powers and duties of GAO. However, the Trust is not 
without oversight beyond mandatory financial audits. Through regular 
reports and other communications, the Trust's financial condition is 
monitored by the Board and other agencies of the federal government. 
Further, the Trust has appropriately recognized the importance of 
oversight and transparency by taking the initiative to commission four 
performance audits since it was organized in 2002. These voluntarily 
initiated audits are comparable to and in some cases more 
comprehensive than those of the state pension plans we reviewed. 

Nonetheless, our review suggests that there are aspects of the 
approach to accountability for the Trust that could be strengthened. 
First, while 42 of the 50 state plans we surveyed and both federal 
agencies we reviewed are subject to performance audits that are 
initiated and conducted by external entities, the Trust is not. 
Instead, it has commissioned private firms to conduct audits whose 
subject and scope the Trust defines. However, a lack of independently 
initiated audits raises the risk that auditors could be directed away 
from potentially problematic issues. Second, 29 of the 50 state plans 
we contacted are subject to external audits on a specific calendar 
cycle, and those plans with an internal auditor are audited on an 
ongoing basis. Although the Trust has opted to commission performance 
audits every 2 to 3 years since its creation, it does not have a 
written policy requiring such audits, defining their scope, or 
establishing their frequency. Finally, while some states require that 
specific subjects be periodically reviewed, the Trust does not. For 
example, one state now requires plans to undergo ethics and conflict 
of interest reviews every 3 years--the most recent of which assessed 
whether fiduciaries act for the sole benefit of participants, and 
whether the highest ethical practices were being upheld. 

Any improvement in Trust's performance audit oversight should help 
ensure that its investment decisions are insulated from political 
influence. Our review of state pension plans and selected federal 
programs suggests that while external audits are not necessarily a 
source of such influence, such influence may not be beyond the bounds 
of possibility. However, concerns about such "political risk" should 
be balanced against the management and financial risk that exists in 
situations where oversight is not clearly independent. 

The Trust's recent initiative to document a performance audit policy 
and to involve the Board in determining the subject and scope of 
future audits adds a welcome external perspective that is likely to 
enhance the independence of future audits. However, Trust action-- 
including any interagency agreements--would not necessarily be 
permanent, and under current law the parties could revoke such an 
agreement at any time. After more than a decade of Trust operation, it 
may be time to consider whether such an arrangement should be made 
permanent, while still ensuring that Trust assets are managed solely 
with the long term best interest of railroad retirees and their 
families in mind. 

Agency Comments: 

We provided a draft of this report to the National Railroad Retirement 
Investment Trust, the Railroad Retirement Board, and the Railroad 
Retirement Board Office of Inspector General for review and comment. 
We received formal written comments from all three organizations, and 
each generally agreed with our findings and analysis. Among other 
comments, the Trust indicated that it would seek to address two issues 
GAO noted with regard to the draft memorandum of understanding between 
the Trust and the Board regarding performance audits between the Trust 
and the Board. The Board's OIG summarized some of its long-standing 
concerns about oversight of the Trust, and raised other concerns. For 
example, the OIG stressed the importance of audits conducted by 
independent external entities, and expressed opposition to any 
arrangement that would allow the Trust and the Board to control 
performance audits. The OIG also disagreed with the concern expressed 
by the Board that its audits could lack independence or be a source of 
political influence. The Trust, Board, and OIG formal comments are 
reproduced in appendixes II, III, and IV, respectively. The Trust and 
Board also provided a number of technical comments, which we 
incorporated as appropriate. 

Because performance audit policies or the work of the Pension Benefit 
Guaranty Corporation, the PBGC Office of Inspector General, the 
Federal Retirement Thrift Investment Board, and the Department of 
Labor's Employee Benefit Security Administration are reflected in our 
report, we also provided those agencies with a copy of the report for 
technical review and comment. None provided formal written comments, 
but the Federal Thrift Investment Board and the PBGC provided 
technical comments, which we have incorporated at appropriate. 

As agreed with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
from its issue date. At that time, we will send copies of this report 
to appropriate congressional committees, the agencies named above, and 
other interested parties. In addition, this report will be available 
at no charge on the GAO website at [hyperlink, http://www.gao.gov]. 

If you have any questions about this report, please contact Charles 
Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
found in appendix V. 

Signed by: 

Charles A. Jeszeck,
Director, Education, Workforce, and Income Security: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to answer the following questions: 

1. What performance audit policies and practices exist for the 
oversight of the National Railroad Retirement Investment Trust (Trust)? 

2. What performance audit policies apply to comparable organizations, 
such as large state public pension plans? 

3.What options, if any, could be pursued to improve Trust performance 
audit policies and what tradeoffs do stakeholders believe such options 
entail? 

To answer our first question, we reviewed applicable federal laws, 
regulations, and Railroad Retirement Board (Board) policies and 
procedures regarding oversight of the Trust and the memorandum of 
understanding established between the Board, the Trust, the Office of 
Management and Budget (OMB), and the Department of the Treasury. 
Additionally, we interviewed representatives of the Board, the Trust, 
and the Railroad Retirement Board's Office of Inspector General (OIG) 
to determine the nature and frequency of oversight and audit policies 
and practices regarding the Trust. We also obtained and reviewed 
relevant documents including each of the four Trust-commissioned 
performance audit reports, the Trust's annual reports to Congress, and 
the Trust's financial statement audit reports. Additionally, we 
reviewed relevant OIG reports and communications between the Board and 
OIG related to Trust audit and oversight. 

To answer our second question, we conducted in-depth illustrative case 
studies of audit policies and practices in seven states: California, 
Florida, Illinois, New York, Tennessee, Texas, and Pennsylvania. We 
purposefully selected case studies based on region, plan 
participation, and governance and oversight structure.[Footnote 45] As 
part of each case study, we interviewed representatives of the state's 
Auditor General or equivalent and either representatives of the 
state's largest public employee pension plan or state agency that, 
similar to the Trust, solely managed the investment of pooled pension 
assets. Further, we obtained and reviewed relevant state performance 
audit reports. Specifically, we reviewed relevant state audit reports 
issued since 2008.[Footnote 46] We generally obtained these reports 
from the website of the states' Auditors General or equivalent. During 
interviews with state Auditors General or equivalent and state pension 
officials, we discussed these reports and asked for copies of other 
relevant audit reports issued since 2008. Where available, we also 
reviewed audit reports produced by state plans' offices of internal 
audit. As internal audit reports are generally not publicly available, 
we asked officials to provide us with copies of these reports 
particularly those that reviewed aspects of the plan related to 
investment strategy and management that would be most applicable to 
the functions of the Trust. To obtain higher-level data regarding the 
performance audit policies and practices of the remaining 43 states, 
we also conducted structured interviews with officials of each state's 
largest defined benefit (DB) public employee pension plan or pension 
investment entity as available. To identify the state DB plans or 
pension investment entities, we used information obtained from Pension 
and Investment's Research Center and the National Association of State 
Retirement Administrators (NASRA).[Footnote 47] Based on our audit 
objectives, we developed standard questions and held pre-tests with 
officials in two states to obtain feedback on the clarity and 
relevance of our questions. While the majority of our questions could 
be answered with a yes or no response, we also included more open 
ended questions regarding the frequency of external and internal 
performance audits and to what extent plan officials found such audits 
useful. 

To obtain information on comparable federal entities, we also 
interviewed officials from the Pension Benefit Guaranty Corporation's 
(PBGC) single employer insurance program and the Federal Retirement 
Thrift Investment Board that administers the Thrift Savings Plan. 
While the functions of these organizations are not completely 
analogous to the functions of the Trust, like the Trust, both programs 
manage large asset pools for the benefit of retirees and their 
beneficiaries. Further, we also interviewed officials from two federal 
agencies that have audit authority of these programs--respectively, 
PBGC's Office of Inspector General and the Department of Labor's 
Employee Benefit and Security Administration--to determine the nature 
and frequency of their audit practices. Additionally, we obtained and 
reviewed relevant federal audit reports issued since 2008. Further, we 
interviewed representatives of NASRA, and the Association of Public 
Pension Fund Auditors to discuss audit practices of public plans. To 
obtain information on the audit practices of private sector DB plans, 
we reviewed relevant provisions of the Employee Retirement Income 
Security Act of 1974 (ERISA) and interviewed private sector plan 
fiduciary experts, ERISA experts, and representatives of an external 
consulting firm that has been commissioned by private sector plans to 
conduct performance audits. 

To answer our third question, we developed four policy options 
regarding improved Trust oversight. These options were based 
substantially on the oversight models that apply to state pension 
plans or comparable federal agencies, as developed under objective 2. 
We then interviewed experts and stakeholders familiar with the Trust-- 
including representatives of the Board, the Trust, the OIG, and other 
federal officials, as well as railroad labor and management--to 
discuss the potential benefits of establishing independent performance 
audits of the Trust. We discussed with them the benefits and drawbacks 
of four possible policy options: 1) permitting OIG audits, 2) 
requiring periodic audits with external input on scope, 3) 
establishing external investigative authority, and 4) establishing an 
office of internal audit. We also solicited input on the mechanisms-- 
statutory or otherwise--by which the options could be implemented. We 
also obtained and reviewed existing principles and guidelines 
regarding the audit and oversight of DB pensions plans, especially 
those applicable to investment management activities. Examples of such 
principles include the guidelines published by the Organisation for 
Economic Cooperation and Development (OECD) and the National 
Conference on Public Employee Retirement Systems (NCPERS) among 
others.[Footnote 48] Additionally, we reviewed academic articles on 
pension plan governance and oversight and relevant auditing and 
internal control standards such as the American Institute of Certified 
Public Accountants Statements on Auditing Standards, Government 
Auditing Standards, International Standards for the Professional 
Practice of Internal Auditing (Standards), and Standards for Internal 
Control in the Federal Government.[Footnote 49] 

We conducted this audit from April 2013 to May 2014 in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient and 
appropriate evidence to provide a reasonable basis for our findings 
and conclusions based on our audit objectives. We believe that the 
evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the National Railroad Retirement Investment 
Trust: 

Picard Kentz & Rowe LLP: 
1750K Street, N.W. 
Suite 1200: 
Washington, D.C. 20006: 
tel (202) 331-4040: 
fax (202)331-4011: 

April 21, 2014: 

Charles A. Jeszeck: 
Director: 
Education, Workforce, and Income Security Issues: U.S. Government 
Accountability Office: 441 G Street, NW: 
Washington, DC 20548: 

Re: Retirement Security: Oversight of the National Railroad Retirement 
Investment Trust (GAO-14-312): 

Dear Mr. Jeszeck: 

This is in response to your April 11, 2014 request for written 
comments on the draft report, Retirement Security: Oversight of the 
National Railroad Retirement Investment Trust (GAO-14-312) ("Draft 
Report") prepared by the U.S. Government Accountability Office 
("GAO)."[Footnote 1] We appreciate the opportunity to submit our views 
and would offer the following observations. 

1. Proposed Memorandum of Understanding on Performance Audits. The 
Draft Report discusses the proposed memorandum of understanding (MOU) 
between the Railroad Retirement Board (RRB) and the National Railroad 
Retirement Investment Trust (NRRIT) regarding performance audits as a 
positive development, but expresses concern in several places 
(notably, pages 14,25, and 28) that the draft MOU "does not mention 
some audit subjects, such as fiduciary responsibility and conflicts of 
interest policies" within its list of potential topics.[Footnote 2] 
The exclusion of these topics was not intentional. The NRRIT Board 
will propose adding these topics to the draft MOU at our next joint 
oversight meeting with the RRB on May 1,2014. The GAO Draft Report 
(page 14) also observes that the draft MOU "does not specify that key 
subjects should be addressed within specified timeframes for 
addressing particular areas to audit." Again, this is not an area of 
controversy and the NRRIT Board will work with the RRB to include 
appropriate language to establish subject priorities and timelines in 
the draft MOU. Finally, the GAO Draft Report (page 14) observes that 
the NRRIT Audit Committee Charter does not expressly assign 
responsibility for performance audits to the Audit Committee. Each of 
the four performance audits conducted by NRRIT to date has been 
overseen by the Audit Committee. Nonetheless, the Audit Committee 
Charter will be updated to include this responsibility more explicitly. 

2. Statement of Social Insurance Audit. The Draft Report (page 24) 
includes a discussion about the costly Statement of Social Insurance 
(SOSI) audit that the RRB requires NRRIT to perform to provide the RRB 
Actuary with an audited December 31 net asset number to be used in the 
annual SOSI calculation. Prior to 2006, the Trust routinely provided 
the RRB Actuary with a preliminary net asset number calculated as of 
December 31. The difference between the preliminary unaudited number 
and the audited number has always been insignificant.[Footnote 3] In 
fact, over the past eight years during which NRRIT has been required 
to incur the cost of a second financial audit for the SOSI, the 
average percentage difference between the December 31 unaudited net 
asset number and the audited net asset number has been less than two 
tenths of one percent (.1184%), and at no point has it exceeded one 
half of one percent. 

This differential is very small and relates almost entirely to updated 
information received by the custodial bank on private equity and real 
estate investment partnerships. Because of the delay in getting 
updated market valuations of these illiquid assets, these partnership 
valuations are presented by NRRIT's custodian, Northern Trust Company, 
on a quarter lag.[Footnote 4] Presenting "unaudited" net assets with a 
portion of Trust assets valued on a quarter lag allows the Trust to 
provide timely performance information to relevant parties, with the 
understanding of all recipients that, in the information provided, a 
portion of Trust assets (less than 15%) are valued at the end of the 
prior quarter. This is consistent with the practices of other plans of 
which we are aware. In addition to this being standard industry 
practice, it also is appropriate for the vast majority of the Trust's 
internal and external reporting requirements.[Footnote 5] 

Generally Accepted Accounting PrinCiples ("GAAP") require that all 
assets be valued as of the balance sheet date in the financial 
statements. As such, for audited GAAP financial statement purposes 
only, an adjustment is made to "true up" the valuations for these 
illiquid investments, when such more recent valuations are available. 
Thus, the difference between the "unaudited" and "audited" figure is 
simply an adjustment made in order to comply with GAAP, rather than 
the correction of any sort of error or misstatement in the "unaudited" 
numbers. In completing the SOSI audit, NRRIT takes note of any updated 
valuation reports received from these investment partnerships prior to 
the agreed upon March 31 deadline for transmittal to the RRB. The 
Trust's independent auditor spends a significant amount of time 
testing the valuations and the adjustments booked during every 
financial statement audit. As noted earlier, while the differences in 
going from "preliminary" to "final" net assets have been insignificant 
over the past eight years, there has never been a difference (of any 
size) in going from "final" net assets to "audited" net assets. 
Furthermore, there has never been an accounting error or audit 
adjustment proposed by our external auditors for any of the SOSI 
audits since these audits began eight years ago. 

The Draft Report includes a quote attributable to the OIG in the 
context of the SOSI discussion which is misleading. It makes the point 
that asset values can be significantly different between September 30 
and December 31.[Footnote 6] This is a fact with which we agree. 
However, NRRIT has never proposed using September 30 net assets for 
the SOSI calculation. Our disagreement is over the value, if any, of 
requiring an expensive audit of the December 31 net asset number, when 
the difference between the audited and unaudited number is 
insignificant. 

3. 2006 Performance Audit. The Draft Report (page 13) discusses the 
2006 internal audit undertaken by the Trust and indicates criticism of 
the Trust for not pursuing one of the auditor's specific 
recommendations and for not pursuing a second audit phase proposed by 
the outside firm. In 2006, the NRRIT Audit Committee hired one of the 
major accounting firms to do a broad-based assessment of NRRIT' s 
internal controls and evaluate whether there were any gaps that needed 
to be addressed. At the outset of the audit, the firm was asked to do 
a broad-based "Stage I" review, to evaluate all internal control areas 
and identify any gaps that posed risk to NRRIT. If any were found, the 
auditor was to recommend corrective action and/or identify areas of 
concern that needed more detailed review. As noted in the Draft 
Report, footnote 29, the review found only three potential gaps in 19 
areas examined, all relatively small issues. NRRIT took corrective 
action with respect to the firm's two comments regarding the review 
ofSAS70 reports from its key vendors. With respect to the third issue 
identified -- how to select asset categories to be drawn from in order 
to pay benefits when the asset classes are in complete balance -- the 
Audit Committee concluded that this was a hypothetical issue that the 
Trust's rebalancing policy adequately addressed. The firm did not 
identify other areas of concern that specifically required attention. 
Rather, the firm proposed an additional work project to perform a 
detailed survey of other areas for the Trust. The new survey was 
expected to take 680 hours, with a proposed budget of several hundred 
thousand dollars. The Audit Committee determined that nothing had been 
identified in the Stage 1 report that warranted the additional review 
and accompanying expense, and elected to conclude this engagement. 

4. NRRIT Governance and Best Practices. The Draft Report (page 8) 
discusses the importance of adequate oversight of pension assets and 
cites incidents of improper behavior at certain other plans. The Draft 
Report should make it clear that no issues with NRRIT's governance 
structure, audit practices, due diligence, or any other operational 
matter have been identified, and that this GAO review was not 
initiated in response to any perceived existence of such issue. 

We also would note that in addition to the existing RRB oversight 
regimen, and the practice of NRRIT-initiated performance reviews, all 
other professional reports on NRRIT's governance practices have been 
universally positive. 

* In the context of a November 2007 GAO review of alternative 
investment practices of pension funds undertaken at the request of the 
Senate Committee on Finance, the GAO surveyed NRRIT's investment 
evaluation and diligence practices and complimented NRRIT on its 
detailed screening process for such investments. Subsequently, the GAO 
asked for a copy of NRRIT's detailed internal checklist questionnaire 
to help guide GAO as to issues that other pension fiduciaries should 
examine as they evaluate these more complex investments. 

* In April 2009, senior staff of the U.S. Senate Special Committee on 
Aging, accompanied by a GAO investigator, spent several hoUrs with 
NRRIT staff and counsel reviewing the role of the NRRIT Board in 
decision-making on asset allocation, risk/reward choices, and approval 
of investment recommendations. They also examined the staff's 
processes for manager searches and diligence review. Finally, they 
inquired about how the statutory tax adjustment mechanism serves as an 
automatic risk adjustment protection, by increasing tax rates if fund 
balances drop below a certain level. This meeting with NRRIT was 
scheduled in the context of a separate Aging Committee investigation 
of controversial management practices at the Pension Benefit Guarantee 
Corporation. At the conclusion of the NRRIT meeting, the Aging 
Committee representatives commented that NRRIT's Board and staff 
processes and practices were well thought out and implemented 
consistently, and should serve as a positive model for investment 
decision making in complex institutions. 

* In 2011, the Social Security Bulletin published a detailed review of 
NRRIT's governance structure completed by a Social Security 
Administration policy analyst whose conclusions about the steps that 
NRRIT had taken to develop its governance structure were consistently 
positive.[Footnote 7] 

* In 2013, the Center for Retirement Policy Research at Boston College 
published three articles by its Program Director, Steven Sass, on the 
development of NRRIT, including one cited on page 5 in the Draft 
Report. That same article reviewed NRRIT's governance structure and 
practices against a detailed, best practices standard and concluded 
that "By these criteria, NRRIT is an exemplary manager of public 
pension assets."[Footnote 8] 

5. Required Statutory Separation of RRB and the Trust. The Draft 
Report (page 5) notes that the RRB is not represented on the NRRIT 
Board of Trustees because the RRB is a federal agency. The legislative 
history of this required separation is more extensive and is 
indicative of the steps that Congress took to separate the federal 
government from the NRRIT decisionmaking process. The original 
proposal for this new investment entity, agreed to by rail management 
and rail labor in January 2000, would have included the three members 
of the RRB on the investment entity's board. However, Congress wanted 
the new entity to operate and make investment decisions in a manner 
more removed from the potential influence of the federal government 
and rejected this approach. The legislation that passed the U.S. House 
of Representatives later in 2000 removed the three RRB members from 
the proposed investment board. Under that version of the legislation, 
the RRB still would have selected the seven members of NRRIT's Board. 
The 2000 legislation was not enacted. In reconsidering the legislation 
in 2001, the House of Representatives took a further step to separate 
the RRB from the operation of the proposed investment entity and 
removed the power to appoint Trustees from the RRB and vested it 
directly with rail labor and rail management. This is how the statute 
was enacted in December 2001, and it remains as such today. 

6. Quarterly Conference Call Meetings between RRB and NRRIT Officials. 
The Draft Report (page 11) briefly mentions that the financial and 
legal staffs of the Trust and Board conduct quarterly conference calls 
on "which investment performance, ongoing audits, or other issues are 
discussed." To be more specific, these conference calls are scheduled 
after every regular NRRIT Board meeting and are used primarily to 
review each item on the NRRIT Board agenda (e.g., investment 
recommendations, operational issues, administrative or legal issues) 
and action taken by the Board with respect to each such agenda item. 
This exchange provides the RRB with a timely review of all key issues 
and decisions of the NRRIT Board, and supplements the RRB members' 
semi-annual in-person meetings with NRRIT's Board of Trustees. 

We appreciate having the opportunity to comment on the Draft Report 
and would request that our comments be reflected either in the final 
version of the report or in its appendices. 

Sincerely, 

Signed by: 

John J. Salmon: 
Counsel to the Board: 
National Railroad Retirement Investment Trust: 

Appendix II Footnotes: 

[1] In addition to these written comments, we have also communicated 
with GAO staff about other changes that we would consider to be 
clerical or technical in nature. 

[2] As you are aware from your review, the Trust has had a Conflicts 
of Interest policy in place since July 2002. Each year, every Board 
member and member of NRRIT' s staff is required to review the policy 
and sign a confirmation that he or she is familiar with its terms and 
agrees to comply with its requirements. 

[3] Use of the contrasting terms "unaudited" vs "audited" net assets 
may be misleading and may indicate to a reader that, in going from 
"unaudited" to "audited" figures, any difference is attributable to an 
error or misstatement identified during an audit. In reality; a more 
accurate label may be "preliminary" vs "final" net assets. The 
"preliminary" figures are presented on a certain accelerated time line 
that precludes current valuations for illiquid investments from being 
incorporated. The "final" net assets reported in the SOSI financial 
statements are released three months after the end of the December 31 
quarter on March 31 and, as such, allow for the valuations to be 
updated in accordance with GAAP. While the differences in going from 
"preliminary" to "final" net assets have been insignificant over the 
past eight years, there has never been a difference (of any size) in 
going from "final" net assets to "audited" net assets. 

[4] On any given quarter end, the custodian provides an "unaudited" 
net asset figure, which is comprised of two components. First, it 
includes current quarter-end valuations for the majority (more than 
85%) of Trust assets, which are highly liquid investments with readily 
available market values. In addition, this "unaudited" figure includes 
valuations from the previous quarter end for that portion of Trust 
assets (less than 5%) which are illiquid, and do not have a readily 
determinable market value. 

[5] This practice also is specified in NRRIT's reporting 
responsibilities to Treasury and RRB as set forth in the 2002 MOU. 

[6] It should not be lost on the reader that in making the September 
30 December 31 comparative, the OIG official chose to highlight the 
fourth quarter of 2008, which saw the greatest 3-month drop in the 
financial markets going back to 1932 and the Great Depression, further 
driving home the effect of the non-relevant comparative. 

[7] Whitman, Kevin. 2011. "Managing Independence: The Governance 
Components of the National Railroad Retirement Investment Trust." 
Social Security Bulletin 71(2). 

[8] Sass, Steven A. 2013. "An Assessment of the 2001 Reform of the 
Railroad Retirement Program" Center for Retirement Research, Boston 
College, p. 25. 

[End of section] 

Appendix III: Comments from the Railroad Retirement Board: 

United States of America: 
Railroad Retirement Board: 
844 North Rush Street: 
Chicago, Illinois 60611-2092: 
Board Members: 
Michael S. Schwartz, Chairman: 
Walter A. Barrows, Labor Member: 
Jerome F. Kever, Management Member: 

April 28, 2014: 

Charles Jeszeck: 
Director, Education, Workforce, and Income Security: U.S. Government 
Accountability Office: 441 G St. NW: 
Washington DC 20548: 

Dear Mr. Jeszeck: 

This letter is to provide the comments of the Railroad Retirement 
Board to the draft report entitled "Oversight of the National Railroad 
Retirement Investment Trust." The Board understands that the National 
Railroad Retirement Investment Trust (the Trust) will submit comments 
separately. 

Initially, the Board reaffirms the view which it expressed to the 
Government Accountability Office (GAO) during the study. That is, that 
sufficient information is provided to the Board by the Trust through 
formal and informal channels to allow oversight by the Board within 
the limits of the law. The Trust provides both an annual report to the 
Board based on an October to September fiscal year, and a Statement of 
Social Insurance based on a calendar year. The Board Members meet 
twice annually with the Trustees, and the Trust staff confers with the 
General Counsel and Chief Financial Officer after each quarterly Trust 
meeting. The Trust also reports monthly on the market value of Federal 
and non-Federal holdings. As the draft GAO report notes, the NRRIT and 
the Board are currently drafting a Memorandum of Understanding which 
would require the Trust to undertake periodic performance audits, 
beginning in 2015. 

Moreover, the Board believes it has correctly interpreted the intent 
of Congress with respect to limiting the influence of the Federal 
Government over investment of the assets held by the Trust. A 
comparison of House Bill 4844 as set forth at 146 Congo Rec. H7335 
with the text of section 150) of the Railroad Retirement Act (45 
U.S.C. § 231n(j)) as amended by Public Law 107-90, shows that Congress 
removed earlier language providing for the appointment of Trustees by 
the Railroad Retirement Board. By providing for the appointment of six 
Trustees by industry and labor, with the seventh independent member 
chosen by the industry and labor Trustees, the final draft as enacted 
clearly indicates Congress intended to insulate the Trust from control 
by the Board. It is also noteworthy that section 15(j) prohibits 
Members of the Railroad Retirement Board from serving as Trustees. The 
same provision further requires that Trustees have experience and 
expertise in the management of financial investments and pension plans. 

In addition to the foregoing, the Board also notes the following 
technical corrections to the draft report: 

* The report should clarify in footnote 13, on page 4, that the 
Railroad Retirement Board (Board) is an independent agency in the 
Executive branch of the United States Government and is charged with 
the administration of the Railroad Retirement Act of 1974, as amended 
(45 U.S.C. § 231 et seq.) and the Railroad Unemployment Insurance Act 
(45 U.S.C. § 351 et seq.). The Railroad Retirement Act of 1974 (P.L. 
93-445) (88 Stat. 1305) amended the former Railroad Retirement Act of 
1937 in its entirety. 

* Both employer and employee tier II taxes are tied to the average 
account benefits ratio pursuant to section 3241 of the Railroad 
Retirement Tax Act (26 U.S.C. § 3241). 

* While the Board understands that the draft GAO report intends to 
state the funding of benefit payments under the Act in broad terms, 
the Board notes that in addition to the tier II annuity component 
calculated under section 3(e) of the Act (45 U.S.C. § 231b(e)), fund 
transfers from the NRRIT to the Railroad Retirement Account fund 
supplemental annuity benefits under section 2(b) of the Act (45 U.S.C. 
§ 231a(b)) and tier I benefit component payments for cases where the 
Social Security Act does not provide equivalent benefits. 

* Similarly, the Board notes that while the report refers to Tier I 
benefits broadly, more precisely only the social security eqUivalent 
portion of the Tier I benefits is not funded through transfers from 
the Trust. 

The Board wishes to express its thanks to GAO for this opportunity to 
present its comments to the draft report. 

Sincerely, 

Signed by: 

For The Board: 
Martha P. Rico: 
Secretary to the Board: 

[End of section] 

Appendix IV: Comments from the Railroad Retirement Board Office of 
Inspector General: 

United States Railroad Retirement Board: Office of Inspector General: 
844 N. Rush Street 
Chicago IL 60611-2092: 

April 18, 2014: 

Charles A. Jeszeck: 
Director, Education, Workforce, and Income Security: Government 
Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Jeszeck: 

The Railroad Retirement Board (Board) Office of Inspector General 
(OIG) appreciates the opportunity to review and comment on the 
Government Accountability Office Draft Report entitled: Retirement 
Security: Oversight of the National Railroad Retirement Investment 
Trust (GAO-14-312). 

The OIG has a long-standing position regarding the lack of provision 
for performance audits for the Trust. For example: 

* In March 2008, the OIG released a statement of concern highlighting 
the lack of performance audit requirements for the Trust. We noted 
that the lack of performance audits of Trust activities and operations 
leaves the Railroad Program with fewer safeguards than those 
established to protect the retirement investments of Federal and 
private sector workers. 

* In September 2011, the OIG reviewed the Trust's administrative 
expenses and found that since its inception, the expenses have 
steadily risen and increased the overall cost structure by more than 
70%. This increase can be partially explained by the number of fund 
management staff that would be needed to manage increasingly complex 
risk-based investment strategies and transactions. However, minimal 
information is released publicly to justify the recurrent increases in 
administrative expenses. 

* In August 2012, we reviewed the significant compensation, bonus, and 
incentive payments made to the Trust's staff. From FY 2007 through FY 
2009, when Trust's net assets declined by more than 28%, select Trust 
staff received bonus and incentive compensation exceeding $1.2 
million. We recommended that the Board enforce sensible limits on 
future compensation, bonus, and incentive payments to the Trust's 
staff. The Board responded that the law limits the decisions and 
actions of the Trust which are subject to oversight by the Board. 
According to the Board, this situation failed to demonstrate a basis 
for civil action by the Board under RRA section 150) against the 
Trustees. 

OIG Comments on Performance Audits: 

The GAO report highlights the four performance audits commissioned by 
the Trust which equate to one audit every three Years. Performance 
audits were defined broadly by GAO to include any type of audit or 
oversight review. With respect to GAO's broad definition of 
performance audits, the OIG believes that the $25 billion in Federal 
funds reported on the Board's Federal financial statements should be 
subject to performance audits in compliance with Generally Accepted 
Government Auditing Standards (GAGAS). There is no indication that the 
Trust's commissioned audits were performed in accordance with GAGAS. 

We limited our comments regarding the performance audits to focus on 
self selection of audit areas. The majority of comparable state and 
Federal programs studied by GAO were subject to performance audits by 
one or more independent external entities. The two Federal programs 
are also subject to performance audits by GAO. These independent 
auditors can initiate performance audits without the prior consent of 
the audited entity. In contrast, the Trust defines the subject and 
scope of its performance audits. In our opinion, selection by the 
Trust of the audits to be performed would appear to represent a 
potential conflict of interest. 

The report states that the Trust and the Board have prepared a draft 
Memorandum of Understanding (MOU) that would require a performance 
audit at least every 3 years addressing 1 of 12 undisclosed 
"appropriate subjects" based on mutual agreement. However, the 
subjects detailed in the MOU do not address fiduciary responsibility 
and conflicts of interest. As previously stated, the OIG is opposed to 
any arrangement that allows the Trust and the Board to control 
performance audits. In our opinion, a statutory amendment to provide 
for performance audits would have greater permanence, since the Trust 
could not legally opt to discontinue new oversight practices. 

We strongly disagree with the suggestions that the OIG's performance 
audits would lack independence, would be politically influenced or 
motivated, or would be designed to impact investment performance. The 
Office of Inspector General adheres to the highest ethical principles 
and conducts its work with integrity by encompassing the GAGAS 
elements of objectivity, independence, professional judgment, 
confidentiality, and competence. In our opinion, concerns of political 
influence or risk originating from the OIG community are illogical 
when weighed against the real threats of private self-interest and 
maximization of personal wealth. 

OIG Comments on Statement of Social Insurance Audit: 

The report indicates that differences in the value of Trust assets 
between the three month period of September 30th and December 31st are 
"generally not large" and do not warrant the conduct of multiple 
audits. However, history has shown that an entity's financial 
stability can change in a single day. In addition, the second audit is 
required to maintain consistency with other Federal agency Statements 
of Social Insurance. The $1.6 million cumulative cost of the December 
31st audit accounted for significantly less than 1% (.31%) of the 
Trust's total expenses for the period since 2005 and should not be 
considered wasteful when considering the valuation of net assets of 
approximately $25 billion. The Trust's investment staff bonuses and 
incentive payments exceeded $2,5 million during this same period, The 
Trust's bonuses and incentive payments might also be considered 
wasteful if the plan participants were made aware of them. 

OIG Comments on Transparency: 

The Board indicated that they saw "no need for enhanced oversight" and 
in the event of a participant complaint it would take action, However, 
in our opinion participant complaints are unlikely to be identified 
due to the Trust's limited transparency and ineffective oversight 
structure. 

The report indicates that the Trust employs 18 staff but does not 
disclose the number of external asset managers that would fall under 
Trust oversight. The OIG previously reported that detailed individual 
compensation paid to these external investment managers has never been 
publicly disclosed, During FY 2012, the Trust's 135 investment 
managers received fees totaling approximately $58 million or an 
average of approximately $430,000 per manager. 

During FY 2012, the Trust reported to the Internal Revenue Service 
that compensation of $3.1 million had been paid to its 9 full-time 
officers and directors, On an individual basis, this compensation 
exceeds that of Congress; and the CEO's compensation exceeds that of 
the President of the United States, Bonuses and incentives paid to 
these individuals ranged from 17% to 43% of base compensation, During 
this period, an additional $102,000 was also paid to 2 part-time 
Trustees where the number of hours worked was not disclosed, The 
remaining 8 Trustees did not receive any form of compensation, This 
continued lack of transparency and oversight with regard to the 
Trust's compensation, bonuses, and incentives cannot be offset if the 
Trust and Board propose that an audit of an "appropriate subject" be 
performed once every three years. 

In addition, during the last 10 years, 4 of the Thrift Savings Plan 
(TSP) funds have outperformed the Trust and 1 TSP fund resulted in 
nearly equal performance, The C Fund and S Fund are designed to mimic 
the Standard & Poor's 500 and Dow Jones indexes, Since inception, 
Trust administrative expenses have increased significantly; while TSP 
administrative expenses have remained stable, In contrast with the 
Trust, the TSP, with assets over $300 billion, is administered by an 
Investment Board with comparable investment experience and there is no 
indication of any political influence or performance impact. 

Again, thank you for the opportunity to comment on this draft report. 
The OIG appreciates the time and effort that GAO placed in its 
evaluation. Please feel free to contact me if you have any questions. 

Sincerely, 

Signed by: 

Martin J. Dickman: 
Inspector General: 

[End of section] 

Appendix V: GAO Contacts and Staff Acknowledgments: 

GAO Contact: 

Charles A. Jeszeck, Director, (202) 512-7215 or jeszeckc@gao.gov: 

Staff Acknowledgments: 

In addition to the contact named above, David Lehrer (Assistant 
Director), Michael Hartnett, and Justin Dunleavy made key 
contributions to this report. In addition, key support was provided by 
Susanna Clark, Mimi Nguyen, Kate van Gelder, Walter Vance, and Craig 
Winslow. 

[End of section] 

Footnotes: 

[1] The Trust is managed by a Board of Trustees, which is responsible 
for investment decisions related to the Trust. 45 U.S.C. § 231n(j)(3) 
and(4). In this report, we generally use the term "Trust" to refer to 
both the Trust itself and to the Board of Trustees. 

[2] The Board is an independent agency in the executive branch that 
manages the Railroad Retirement Program. 45 U.S.C. § 231f(a) and (b). 
In this report, when we refer to the Board, we are referring to the 
Railroad Retirement Board and not to the Trust's Board of Trustees. 
References to the Trust's Board of Trustees will be made explicit in 
context. 

[3] Railroad Retirement and Survivors' Improvement Act of 2001, Pub. 
L. No. 107-90, § 105(a), 115 Stat. 878, 882-86 (codified as amended at 
45 U.S.C. § 231n(j)). 

[4] According to GAO's Government Auditing Standards, performance 
audits provide "objective analysis to assist management to improve 
program performance and operations, reduce costs, and facilitate 
decision making, by parties with responsibility to oversee or initiate 
corrective action and to contribute to public accountability". GAO, 
Government Auditing Standards, [hyperlink, 
http://www.gao.gov/products/GAO-12-331G] (Washington, D.C.: Dec. 1, 
2011). For purposes of this review, we defined performance audits 
broadly to include any type of audit or oversight review other than 
financial statement audits. 

[5] We interviewed officials from each state's largest pension plan or 
from an agency that, like the Trust, solely manages the investment of 
pooled pension assets. Case studies were selected to provide a range 
based on region, plan participation, and governance and oversight 
structure. States structure their public employee pension systems in a 
variety of ways. For instance, Illinois has a distinct entity that 
manages the investment of pooled public employee pension assets, but 
that does not administer benefits. Other states, such as Tennessee, 
have a consolidated retirement system that administers benefits and 
invests the pooled pension assets of all the state's public employees. 

[6] See S. Rep. No. 107-82, pt. 1, at 14 (2001) (accompanying H.R. 
1140, the language of which was included in the enacted law). 

[7] In DB plans, formulas set by the employer determine employee 
benefits, typically based on earnings and years in service. 

[8] Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 26 U.S.C. 
§§ 401-436 and 4971-4982 and 29 U.S.C. §§ 1001-1453). 

[9] 29 U.S.C. § 1104. 

[10] [10] 45 U.S.C. § 231n(j)(5)(A). 

[11] According to Pensions and Investments' 2013 survey of the 1,000 
largest retirement funds, as of September 2013, the Trust was the 
nation's 48TH largest plan trust in terms of DB asset holdings. 

[12] Alternative investments can include a wide range of assets such 
as hedge funds, private equity, real estate, and commodities. While 
there is no commonly accepted definition of private equity for 
example, such funds are generally privately managed pools of capital 
that invest in companies, many of which are not listed on a stock 
exchange. Absolute return strategies are investment strategies that 
are intended to yield positive returns regardless of the conditions in 
the stock market. 

[13] The Board is an independent agency in the executive branch of the 
United States Government and is charged with the administration of the 
Railroad Retirement Act of 1974 (45 U.S.C. § 231 et seq.) and the 
Railroad Unemployment Insurance Act (45 U.S.C. § 351 et seq.) 

[14] Workers with fewer than 10 years of covered railroad service, and 
fewer than 5 years after 1995, are not vested under the railroad 
retirement program and their accounts are transferred into Social 
Security. 45 U.S.C. § 231a(a). Once vested, workers with accrued 
Social Security benefits have those benefits transferred to the Board. 
45 U.S.C. §§ 231b(h) and 231f(c)(2). 

[15] Tier II benefits are a component of a railroad retiree's benefit 
calculated under a formula based only upon earnings and years of 
service. 20 C.F.R. § 216.2. 

[16] 45 U.S.C. § 231n(j)(2). 

[17] 45 U.S.C. § 231n(j)(5)(E). 

[18] Steven A. Sass, An Assessment of the 2001 Reform of the Railroad 
Retirement Program, Center for Retirement Research (Boston: Boston 
College, June 2013) 

[19] A proposal during the Clinton Administration would have invested 
a portion of the Social Security trust fund in publicly traded 
equities, and a proposal during the Bush administration would have 
allowed contributors to divert a part of the Social Security payroll 
tax to individual accounts, where they could be invested in equities. 
See Sass, p.2 

[20] For an extended history of the development of the Trust and the 
political debate surrounding it, see John J. Salmon, The Creation of 
the National Railroad Retirement Investment Trust: Improving Railroad 
Retirement for Labor, Management, and Beneficiaries, copyright 
November 2013. Mr. Salmon serves as counsel to the Trust. 

[21] For example, Board officials stated that pursuant to the OIG's 
request, the Board shares all e-mail communication between the Board 
and the Trust. 

[22] Railroad Retirement Board, Office of Inspector General, Statement 
of Concern: National Railroad Retirement Investment Trust Lack of 
Provision for Performance Audits (March 31, 2008). 

[23] Placement agents are intermediaries or middlemen paid by external 
money managers to help gain access to capital from institutional 
investors. 

[24] Pension Benefit Guaranty Corporation, Office of Inspector General 
Audit Report, Former Director's Involvement in Contracting for 
Investment Services Blurs Roles and Raises Fairness Issues, AUD 2009-
5/PA-08-63-1 (Washington DC: May 15, 2009). 

[25] 29 U.S.C. § 1302. PBGC also manages a program that insures 
multiemployer pension plans, which are established through collective 
bargaining and include two or more employers. 29 U.S.C. §§ 1002(37) 
and 1322a. However, this program does not manage a trust fund that 
invests in public financial markets. 

[26] 5 U.S.C. § 8472. 

[27] 45 U.S.C. § 231n(j)(5)(E). Specifically, the annual management 
report must contain 1) statements of financial position, operations, 
cash flow, internal accounting and administrative control systems; 2) 
the report on the annual audit of financial statements, and 3) any 
other comments and information needed to inform Congress about Trust 
operations and financial condition. 

[28] Book value is the historical amount that has been invested and 
market value is the amount that an investment is currently worth. In 
the case of the Trust, the book value represents the assets that the 
Trust has received for investment and the market value is the current 
value of Trust assets. 

[29] Established shortly after the Trust was created, this memorandum 
is co-signed by officials of the Trust, Board, OMB, and Treasury. It 
also outlines budgetary, transfer, accounting, and financial reporting 
responsibilities for Trust assets and railroad retirement system 
assets held by Treasury. 

[30] This review found some degree of risk in two areas. First, the 
reviewer found that the Trust did not have an adequate process for 
ensuring it received reports on investment managers' control 
activities. The Trust responded that it had taken corrective action. 
Second, the reviewer found that when the Trust needed to sell assets 
so as to provide cash to the Board for benefit payments, its policy 
was to sell from the asset class(es) that were over their allocation. 
However, the Trust did not have a clear policy regarding what assets 
to sell if asset classes were at their target allocation. The reviewer 
recommended that Trust staff document decisions regarding which assets 
to sell in such situations. According to a Trust representative, the 
Trust has not done so because the rebalancing policy contained in the 
Trust's investment guidelines defines parameters within which staff 
may act in these instances. 

[31] As of March 2014, the Trust's audit committee consisted of five 
Trustees--two representing labor, two representing management, and the 
independent Trustee. According to its charter, the duties of the Audit 
Committee include retaining and overseeing an independent auditor to 
conduct the annual audit of the Trust's financial statements, 
overseeing the Trust's conflicts of interest and confidentiality 
polices, and overseeing compliance with the MOU between the Board, 
OMB, and Treasury. 

[32] As discussed later in this report, the large majority of state 
pension plans are subject to performance audits, which in some cases 
have covered topics that Trust audits have not. In addition, best 
practices identified by the National Conference on Public Employees 
Retirement Systems--a trade association representing more than 550 
public sector plans in the United States and Canada--state that plans 
should document a program of assessments and audits to evaluate 
internal controls, performance, and risk. 

[33] Such states may or may not opt to commission, as the Trust has, 
performance audits conducted by outside firms of their choosing. 

[34] The two audit reports had different conclusions regarding the 
plan's ability to operate and invest independently. While the Auditor 
General's report stated that the Governor's oversight did not 
compromise plan independence, the audit the plan commissioned stated 
that as a result of such influence, its investment program was not as 
effective as it should be and was subject to unnecessary political 
risk. 

[35] 29 U.S.C. § 1104. 

[36] 29 U.S.C. § 1134. 

[37] 29 U.S.C. § 1132(a). 

[38] In 2007, GAO reviewed EBSA's ERISA enforcement program: GAO, 
Employee Benefits Security Administration: Enforcement Improvements 
Made but Additional Actions Could Further Enhance Pension Plan 
Oversight, [hyperlink, http://www.gao.gov/products/GAO-07-22] 
(Washington, D.C.: Jan. 18, 2007). The report also provides more 
information on the role other federal agencies play in enforcing ERISA. 

[39] 45 U.S.C. § 231n(j)(5)(A). 

[40] 45 U.S.C. § 231n(j)(5)(F). 

[41] Railroad Retirement Board, Office of Inspector General, Statement 
of Concern: National Railroad Retirement Investment Trust Lack of 
Provision for Performance Audits, (March 31, 2008). 

[42] Railroad Retirement Board Office of Inspector General, Office of 
Inspector General's Proposal to Improve Business Efficiency at the 
Railroad Retirement Board, (September 21, 2011). 

[43] [hyperlink, http://www.gao.gov/products/GAO-07-22]. 

[44] The primary focus of our work was on possible policy options. We 
also solicited stakeholder input on the mechanisms--statutory or 
otherwise--by which the options could be implemented. 

[45] States structure their public employee pension systems in a 
variety of ways. For instance, Illinois has a distinct entity that 
manages the investment of pooled public employee pension assets, but 
does not administer benefits. Other states, such as Tennessee, have a 
consolidated retirement system that administers benefits and invests 
the pooled pension assets of all the state's public employees. 

[46] For two states, we reviewed audit reports published in 2006 and 
2007 because they were the most recent relevant audit reports issued 
by the states' Auditor General or equivalent. 

[47] We identified the largest state plans in terms of the total 
amount of DB pension assets managed. 

[48] OECD Working Party on Private Pensions, OECD Guidelines for 
Pension Fund Governance(June 2009); NCPERS, Best Governance Practices 
for Public Retirement Systems (March 2012). 

[49] American Institute of Certified Public Accountants, Statements on 
Auditing Standards; GAO, Government Auditing Standards, [hyperlink, 
http://www.gao.gov/products/GAO-12-331G] (Washington, D.C.: December 
2011); The Institute of Internal Auditors, International Standards for 
the Professional Practice of Internal Auditing (Standards)(October 
2012); GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[End of section] 

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